20 years of a floating New Zealand dollar

Reserve Bank of New Zealand

2 March 2005

20 years of a floating New Zealand dollar

The Reserve Bank noted that this week marks the 20 year anniversary of the float of the New Zealand dollar. The decision to float the exchange rate on 4 March 1985 reflected a growing consensus among the developed countries, that it is impossible for a country to choose the level of the exchange rate, the rate of domestic inflation, and the level of interest rates simultaneously. New Zealand, in line with other developed economies, made the policy decision to achieve and maintain low and stable domestic inflation, leaving the exchange rate free to float.

Before adopting a floating exchange rate, New Zealand had experienced a variety of exchange rate mechanisms, including a crawling peg between June 1979 and June 1982, and fixing the exchange rate against a basket of currencies between 1982 and 1985. Under these arrangements, the Reserve Bank acted as a residual buyer or seller, trading foreign exchange in whatever quantities were necessary to support the exchange rate.

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

The New Zealand dollar is now the 11th most traded currency in the world, with daily turnover in the New Zealand market of around $7.5 billion. The New Zealand dollar is now part of an international system known as continuous linked settlement (CLS) by which both legs of financial transactions can be settled simultaneously.

The Bank marked the 20 year anniversary of the float by hosting a function, attended by banking sector representatives and other key players at the time of the float.

ENDS

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