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RBNZ Celebrates 20 Years of a Floating Dollar

The Reserve Bank of New Zealand (RBNZ) celebrated the 20th anniversary of the floating of the New Zealand dollar on March 4 with a function attended by banking sector representatives and other key players at the time of the float.

The RBNZ says that the floating regime has weathered several business cycles and plenty of shocks. Events included the stock market collapse of the late 1980s, the transition to low and stable inflation in the early 1990s, the Asian crisis, several droughts and large commodity price fluctuations.

 

During the first 20 years of free float, the Kiwi hit a low against the US dollar on April 3, 2001 when it traded at 0.3984 and a high of 0.7304, appropriately enough on February 22, 2005, just before the anniversary (using the 12 noon fixing data from the Federal Reserve Bank of New York.

 

“Throughout the period, the exchange rate has played an important buffering role for the economy, tending to depreciate in tough times and appreciate in good times,” says the RBNZ. “Over time, businesses have become increasingly aware of the impact of the exchange rate cycle on their business plans and increasingly sophisticated in managing these swings.”

 

Before adopting a floating exchange rate regime, New Zealand experienced a variety of exchange rate regimes, much as the Australian dollar did before its float in 1983 (see Profit & Loss, January 2004). These included a crawling peg between June 1979 and June 1982, and an exchange rate fixed against a basket of currencies from 1982 and 1985. Under these arrangements, the RBNZ was required to act in the foreign exchange markets on a regular basis.

The RBNZ says the decision to float in 1985 reflected a growing consensus among the developed countries, that it was impossible for a country to choose the level of its exchange rate, the rate of domestic inflation and the level of domestic interest rates simultaneously.

 

New Zealand, in line with other developed countries, made the policy decision to achieve and maintain low and stable domestic inflation, leaving the exchange to free float.

 

In the most recent Bank for International Settlements Survey of FX Turnover, the NZD was the 11th most traded currency.

Profit & Loss

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