NZ$ strength and its impact

Here is another very useful graphic from the BNZ where they tracked the NZ$ to US$ rate and have noted events that seem to correlate with the movement in the currency. With the vast majority of trade done in US$ this means that when exporters change their US$ into NZ$ they have to pay more of the their US$’s which ultimately affects their profit margins. Below are some comments from exporters in NZ.

“You wake up every morning and the dollar has moved a cent or two cents higher – you feel like cutting your throat. It’s really scary.” Heartland Fruit chairman and Nelson businessman John McCliskie.

“the high dollar was preventing it making any money from its United States market and shaved about $2 million from its profits during the past financial year.” New Zealand King Salmon chief executive Grant Rosewarne

“It’s great if you want to go away but we can’t all go away on holiday all the time,” Nelson Regional Economic Development agency chief executive Bill Findlater.

Here are some advantages and disadvantages of a strong NZ$

Advantages of a Strong Dollar

• A high NZ$ leads to lower import prices – this boosts the real living standards of consumers at least in the short run – for example an increase in the real purchasing power of NZ residents when traveling overseas
• When the NZ$ is strong, it is cheaper to import raw materials, components and capital inputs – good news for businesses that rely on imported components or who are wishing to increase their investment of new technology from overseas countries. A fall in import prices has the effect of causing an outward shift in the short run aggregate supply curve
• A strong exchange rate helps to control inflation because domestic producers face stiffer international competition from cheaper imports and will look to cut their costs accordingly. Cheaper prices of imported foodstuffs and beverages will also have a negative effect on the rate of consumer price inflation.

Disadvantages of a Strong Dollar

• Cheaper imports leads to rising import penetration and a larger trade deficit e.g. the increasing deficit in goods in the NZ balance of payments in 2001
• Exporters lose price competitiveness and market share – this can damage profits and employment in some sectors. Manufacturing industry suffered a steep recession in 2001 partly because of the continued strength of the NZ$, leading to many job losses and a sharp contraction in real capital investment spending and the lowest profit margins in manufacturing industry for over a decade
• If exports fall, this has a negative impact on economic growth. Some regions of the economy are affected by this more than others. The rural areas are affected by a strong dollar in that our produce becomes more expensive to overseas buyers.

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