Quote:
Originally posted by Odysseus
Ok, can someone explain to me how a country's currency can stably increase in relation to the world market.
For example, a few years ago, the USD was considered a strong currency. Thus it took more New Zealand coin to buy a USD.
So, now when the New Zealand dollar increases in value against the USD, it hurts exporters because it costs more foreign currency to buy New Zealand dollars.
Now two things comes to mind about an economy. The more exports do you, the better your economy does. However the better the economy the more the dollar increases. This is an assumption in itself, but it sounds right. So based on these two seemingly conflicting things, how does an ecomony improve with both the "economy" doing well and exporters having a good breeding ground?
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Exchange rates are also affected by interest rates. NZ already has high interest rates internationally which attracts foreign investments. This demand for dollars pushes the price up.
I guess another way of looking at it is that if NZ offers 5% over 12 months whilst the US offers 2%, investors will buy investments with $NZ up until the point where you would expect the currency to increase relative to $US to nullify the gain in higher interest
It's a moot point about whether countries should keep their dollars underpriced or not but that is a big part of what drives it. It is going to start hurting New Zealand companies as their hedges are starting to run out.