What drives the New Zealand dollar?

Release date
01/06/2004
Reference
Vol. 67. No. 2. June 2004
Author
Anella Munro
Main file
This article draws together some of our recent exchange rate research. The research is interpreted against an asset price view of the exchange rate, which has become increasingly relevant as foreign exchange market turnover has become dominated by capital market transactions unrelated to trade in goods and services. Factors that affect expected relative returns on New Zealand dollar assets (eg interest rates, export commodity prices, fixed asset prices and a notion of equilibrium) are found to explain a considerable part of exchange rate cycles, even though they explain only a small part of short-term exchange rate fluctuations. The sources of the relative stability of the Australia-New Zealand bilateral exchange rate and the larger variation of the New Zealand-United States bilateral exchange rate are explored.