Tough timing for those finally heading overseas as NZ dollar weakness sets in

Friday, 6 May 2022

With international travel off the menu for many Kiwis at least until recently, the slip in the value of the dollar may have gone largely unnoticed.

The New Zealand dollar is likely to fall further against the United States and Australian dollars and could dip below 60 US cents later this year, BNZ has forecast.

The declining value of the dollar will be felt by people who are finally calling time on the pandemic and heading overseas for holidays or ‘OE’s, as well as by consumers through higher prices for imported goods.

An upside is the slippage should mask some of the losses being incurred by many Kiwisaver account holders and other investors as overseas sharemarkets take a bath.

US shares resumed their decline overnight on Thursday with the US S&P500 index falling 3.6% and the tech-heavy Nasdaq index slumping almost 5% – its steepest one-day drop in almost two years.

The New Zealand dollar was trading at US64.3c on Friday afternoon, more than 10% down on its year-high, and at a three-year low of A90.4c against the Australian dollar.

* The Treasury uncloaks super-hero scenario for the economy

BNZ said its “central forecast” was that the New Zealand dollar would fall to US62c between July and September and would drop to A89c.

Rising inflation will see household disposable income in Britain fall by 1.75% this year, the Bank of England has warned.

It forecast it would gain some ground against the British pound, ending the year up about 2 pence at £0.54.

But people shouldn’t expect their money to run further even in Britain, as prices there are rising sharply.

The Bank of England updated its forecasts overnight on Thursday to predict annual inflation would top 10% in Britain during the final three months of this year.

It is 40 years since Britain last experienced double-digit inflation.

Like New Zealand’s Reserve Bank, the Bank of England has a target of keeping inflation down to about 2%, but Russia’s war on Ukraine has seen the return of the threat of recessions in the US, Europe and Britain, complicating monetary policy.

BNZ said a lot had changed since it last updated its exchange-rate forecasts in December, including the war on Ukraine, expectations of faster interest-rate rises in the US, and the impacts of China’s ‘zero-Covid’ policy.

“Any one of these would have been enough on its own to cause a significant headwind for the New Zealand dollar.

“The combination of all three has been fatal to the NZ dollar and has upended our assumptions,” it said.

BNZ said it was difficult to see the currency recovering sustainably against a backdrop of “growing global recession risks”.