USD replacement of other currencies inevitable

A de-facto currency union with the US will in the end simply bypass any interim union with Australia, says Victoria University Economist, Professor Roger Bowden.

Writing in the latest issue of Victoria Economic Commentaries, Professor Bowden says that while some may view the prospect of a currency union with the US as yet another dose of cultural imperialism and therefore not on the agenda, time and tide wait for no one and circumstances that force such reconsideration will be as much political as economic in nature.

"The plain fact is that separate currencies are an economic Tower of Babel. As international monetary regimes increasingly converge, it's only to be expected that the tower must eventually give way. One would like to see it go gracefully, rather than fall in a disordered heap", Bowden says.

There are many good arguments both for and against currency union and these can be expected to impact unequally depending upon whether it is Australia or the US that we have in mind as the partner, he says.

"So far as currency partners are concerned history and sentiment may favour Australia but economics definitely favour the US."

However, he says common currencies do not make stronger economies. If the real problems of the New Zealand economy are structural, then tinkering with around with currencies will not fix them.

Bowden believes that in order to chose the most suitable partner for any currency union one must look at some simple facts. New Zealand exports a narrow range of commodities to a wide range of countries and many of these goods, including most or all of our dairy, forestry, sheep and beef are priced in US dollars (USD).

"The USD is our largest trading partner by a country mile, and the US itself is a significant trading partner."

While much investment in New Zealand comes from Australia, on the larger scene investors tend to think in terms of the USD. Both problems could be solved if New Zealand and Australia joined their currencies to the USD. This would also help to solve the 'noticeability' problem, whereby New Zealand assets are too small to figure in world index funds.

He also believes Australia would find the idea of a shared dollar far more attractive if it included a union with the USD. Both countries could also be driven to link with the USD, as the possibility of a South East Asia Trade Zone is more likely to be linked with the USD than the Japanese yen, which is perceived to have troubles of its own, he says.

The New Zealand economy is less diversified than even the Australian, which means there is more potential for instability in the trade account to be amplified into the domestic economy.

If one was to join a currency partner you would want it to be a partner who was much more diversified in its own response to world trade and capital market shocks. Thus, while Australia was not affected too badly by the Asian crisis, the US arguably was affected not at all, making it a more suitable currency partner for New Zealand, says Bowden.

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