The New Zealand dollar is likely to continue to strengthen if the Government and the Reserve Bank don't intervene, an economic analyst has warned.
Greg Smith, managing director of wealth management company Fat Prophets says a "currency war" has broken out amongst the world's major economies.
"Competitive devaluation is back on the agenda," he told Firstline this morning.
"'Currency war' is not the words they really want to use, but it is basically what is happening. Basically the decline in currencies we've seen is on the back of money printing. Everyone's trying to engineer their currencies lower."
Japan and the US have led the way with quantitative easing – or printing money – which the Government has ruled out.
"Japan has been particularly focused," says Mr Smith.
"The yen's fallen about 15, 16 percent this year, so really it's on the back of that money printing, effectively…We're going to see that continue, particularly with the risks that still remain in the global economy. The US is, of course, continuing to print, Japan wants to get out of that deep, deep recession, so [they are] going to continue print money as well."
Mr Smith warns against following suit however, saying we have more scope to lower interest rates instead.
"We're more likely to see conventional policies, so lower interest rates to sort of get that unemployment rate down. I doubt that we're about to engage in quantitative easing as other countries have. It's not a solution to all ills – there are no free lunches – and it could well come back to bite in terms of horror inflation down the track.
"That may be well what happens with countries engaged in quantitative easing. We need to look at countries like Zimbabwe to see that printing lots of money is not a solution to automatic wealth."
The Green Party has suggested printing money to fund the Christchurch rebuild, saying it would bring down the kiwi and reduce the need for the Government to borrow.
Co-leader Russel Norman last year suggested issuing around $2 billion in bonds. At the time the kiwi was worth US$0.82. It is now at US$0.85.
source: newshub archive