PM John Key says NZ$ overvalued, but reluctant to criticise US Fed's second round of quantitative easing

Prime Minister John Key said he was concerned about the high New Zealand dollar, but was reluctant to criticise the second round of quantitative easing (QE2) launched by the US Federal Reserve last week that weakened the US dollar and pushed the Kiwi dollar up to around 30 month highs.

"I’ll leave it for those in the United States to determine what they think is the right economic prescription for their economy," Key said on QE2 at his post-cabinet press conference in Wellington this afternoon.

"Clearly it’s having some impact because it’s actually engineering a depreciation in their currency and that’s likely to help their export sector," he said.

"From New Zealand’s point of view, we are concerned about the Kiwi-US exchange rate, we think it’s overvalued, but on the same side of the coin there’s very little we can do about that."

Key said he was "not at all convinced" currency intervention would work and reiterated what he said this morning on Australia’s recent currency interventions which showed mark-to-market losses of around A$4 billion.

Imbalances would show up elsewhere if exchange rate were fixed

"At the end of the day we have one of the freest floats in the world and while it creates increased volatility for us from time to time, it’s also important to understand there is no easy way out of these matters, and if you have greater control over your currency then the imbalances show up in the economy somewhere else," Key said.

"That will be true in the United States if they have quantitative easing, it will be true in other countries where they are trying to protect their currency," he said.

"If it was just as simple as saying ‘we’re going to fix our exchange rate at a certain point’ and it had no other impact on your economy, then I’m sure we’d be all for it.

"But as Rob Muldoon proved, a fixed exchange rate wasn’t the panacea to our problems back then, and it’s unlikely to be now."

Would help NZ if the Yuan were revalued, but Key won't tell China to do it

Key was asked whether New Zealand would support any moves emerging form APEC that urged the Chinese government to revalue its currency.

“Again we’re not going to dictate to China what its policy around the Yuan should be," Key said.

Key said the Yuan was slowly appreciating and that it was his "long-held view" that modest appreciation of the Yuan was in China’s best interests.

"The reason for that is that if that corresponds with a depreciation of the US dollar, then that’s likely to make the US more competitive, and likely to lead to greater consumer growth in the United States," he said.

"Certainly there’s no question that all countries are feeling the pressure here.

"Whether it’s the US and China – they have their own pressures for different reasons - but actually when I was at the East Asian Summit, the issue that leaders talked the most about at that summit was their own exchange rates and the concern they were having about both their exchange rate relative to either the US and China, or relative to each other.

Key said it would help New Zealand "slightly in terms of export competitiveness" if the Yuan were revalued, "but for all parties it’s time for common sense to prevail".

Return to gold standard?

Key said he had not had a good look at comments from World Bank President Robert Zoellick on a return to a modified gold standard for countries to base the value of their currencies on.

"It’s a long time since we’ve had the gold standard so I’m not really sure what impact it will have for New Zealand," he said.

(Updates with comments Gold standard debate, comments on Yuan.)

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