New Zealand Dollar Slides 5.3% in Six Weeks
The New Zealand dollar (NZD) has experienced a significant decline over the past six weeks, dropping by 5.3% on a weighted-average basis and even more against the USD and most Asian currencies. This shift contradicts the theoretical role of exchange rates, which should stabilize trade by adjusting based on a country's external surplus or deficit. Ideally, countries with deficits should see their currencies depreciate, becoming more price-competitive and balancing trade through increased exports and reduced imports. However, in practice, many countries aim for external surpluses, disrupting this mechanism.
The NZD's recent decline is influenced by financial investment flows, such as overseas borrowing, lending, and asset sales. In New Zealand, funds managers acquiring foreign assets on behalf of local clients have placed downward pressure on the NZD. Central banks, including the Reserve Bank of New Zealand (RBNZ), have historically manipulated currency values through interest rate policies, but this strategy has become unsustainable post-Covid due to high interest rates in the United States, United Kingdom, and Australia.
Charts illustrating the NZD's performance against seven key currencies reveal varying trends. The NZD has fallen sharply against the Korean won and Chinese renminbi, with an 18% drop against the Korean won in just three months. Similarly, the NZD has declined against the Indian rupee, Philippine peso, Japanese yen, and US dollar. The trade-weighted index (TWI) shows that the NZD's overall depreciation began two years ago, with recent declines potentially signaling a larger downward trend.
The destabilizing nature of currency movements can escalate when investors predict continued declines, leading to further asset sales in the weakening currency. This contrasts with basic economic principles, where falling currencies should encourage asset purchases. The RBNZ faces political and economic challenges in raising interest rates to compete with other high-rate countries, making it difficult to stabilize the NZD.