Exchange rates

Press, Volume CXI, Issue 32798, 24 December 1971, Page 12

Exchange rates

The unexpected devaluation of the pound sterling in 1967 was followed within four days by a New Zealand devaluation of 19.45 per cent; yet it took the New Zealand Government longer to decide on a 1.75 per cent devaluation *his year, after the long-awaited United States devaluation. In each case the New Zealand Government waited to learn the Australian Government’s decision, which was inordinately delayed this time by political considerations. The Country Party members of the Federal Cabinet saw the American devaluation as an opportunity to boost sagging rural incomes, and fought long and tenaciously for a 7.89 per cent devaluation —the same proportion as the American devaluation. Mr McMahon and Mr Sneddon are reported to have been the strongest opponents of devaluation, arguing that not only would a 7.89 per cent devaluation be inflationary but that it would invite retaliation by the United States and Japan, and possibly by other countries. The outcome of the Australian debate is fortunate, from New Zealand’s point of view. The modest Australian devaluation has enabled New Zealand to maintain the parity with the Australian dollar which was established in 1967 and which has served this country’s interests well in the last four years. The exchange rates established yesterday theoretically place the Australian and New Zealand dollars 1.75 per eent below their previous values in terms of the pound sterling, 6.48 per cent in terms of the German mark, and 9.58 per cent in terms of the Japanese yen but 6.25 per cent above their previous values in terms of the American dollar.

Compared with the 1967 devaluations of the pound, the New Zealand dollar, and many other currencies, the 1971. realignments of currencies are of minor significance to New Zealand. Even if New Zealand continued to buy and sell the same quantities of goods in the same markets as before, the effect on the country’s trade balance would be less than $5 million in a year. In practice. New Zealand will not buy and sell the same quantities in the same markets; traders will seek to sell more to Germany and Japan and to buy more from the United States. This is, of course, exactly what President Nixon intended when he devalued his currency and persuaded the Japanese and the Germans to appreciate their currencies. Two of the technicalities of the latest New Zealand devaluation should not go unnoticed. The 2.25 per cent variation round the nominal exchange rate instead of the previous maximum variation of 1 per cent allows New Zealand bankers to maintain the previous exchange rate against the pound. In the meantime, at least, this will ensure that New Zealand businessmen dealing with the United Kingdom —still New Zealand’s main trading partner —do not need to vary current contracts. But the severance of the formal link between the New Zealand and United Kingdom currencies is of more long-term significance. Henceforth the New Zealand dollar will move with the United States and Australian currencies instead of with the pound In the event of a further devaluation of the pound the New Zealand dollar would be less likelv tn be devalued.

The realignment of currencies and the removal of the United States surcharge on imports have averted the threat of unilateral devaluations and other retaliatory actions by governments which seemed a not unlikely consequence of President Nixon’s August measures. The American economy should recover from its present lethargy as the trade balance improves: and the rest of the Western world’s traders can be thankful for that prospect These considerations are of more importance to New Zealand than the minor changes in the value of its currency on world markets, for money is merely the lubricant and not the mechanism of international trade. }