New Zealand’s recovery from its worst recession in three decades is being hampered by a surging currency that even central bank Governor Alan Bollard admits he can do little to stem. The New Zealand dollar jumped to a 13-month high yesterday after the government said gross domestic product increased 0.1 percent in the three months ended June 30, the first expansion in six quarters. The currency’s 27 percent gain in the past six months is eroding earnings at exporters such as Fonterra Cooperative Group Ltd., who account for almost a third of the economy. The rally may also restrain Bollard from raising interest rates from a record low -- as traders are betting -- lest further gains choke off the recovery. “The currency’s strength is constraining the economy in such an aggressive fashion that rate increases could well be delayed,” said Stephen Toplis, head of markets at Bank of New Zealand Ltd. in Wellington. He is forecasting the currency will rise next year and the economy will expand 1.7 percent. The New Zealand currency climbed yesterday to 72.13 U.S. cents after the unexpectedly positive GDP report, the highest since August last year. Just two of 12 economists surveyed by Bloomberg News expected growth in the quarter and Bollard also forecast a contraction. Interest Rates The currency gained 2.8 percent in two days after a report on Sept. 22 that the annual current account deficit was the narrowest in more than four years. The same day, Fonterra, the world’s largest dairy exporter, raised its milk price forecast, boosting farm incomes. “The level of the New Zealand dollar remains a concern,” Fonterra Chairman Henry van der Heyden said in a statement. The company assumes the currency will be about 70 cents, he said. It bought 71.81 cents at 10:30 a.m. today in Wellington trading. “The current expansion looks increasingly unsustainable, in part because investor enthusiasm is pushing the New Zealand dollar to prohibitively high levels,” Toplis said. Bollard on Sept. 10 kept the official cash rate unchanged at a record-low 2.5 percent and said he didn’t expect to raise borrowing costs until late 2010 because the economic recovery is “patchy” and needs support. Traders expect Bollard to raise interest rates by 149 basis points over the next year as the economy recovers, according to a Credit Suisse index based on swaps prices. A basis point is 0.01 percentage points. Riskier Assets Expectations of higher interest rates have fanned demand for the New Zealand dollar, as has traders’ willingness to sell U.S. dollars and invest in riskier assets. U.S. interest rates are currently at zero, making borrowing there to invest in New Zealand a popular trade. Bollard this month said he was unable to stand in the way of the currency, and had concluded cutting interest rates was unlikely to make a difference. “We’ve looked pretty closely at whether we thought we would have much impact on the New Zealand currency were we to cut interest rates,” he told a parliament committee on Sept. 10. “Our view was overwhelmingly it wasn’t going to have that effect. There’s a very big tide out there at the minute.” Buoying the currency, the current account deficit narrowed to 5.9 percent of GDP in the year ended June 30, the smallest gap since the year ended Sept. 30, 2004, Statistics New Zealand said on Sept. 22. Milk Prices Fonterra raised its forecast for milk prices by 12 percent, citing increased global demand. Economists estimated that would add at least NZ$700 million ($510 million) to farm incomes, buoying confidence and spending. Bollard may be reluctant to raise the benchmark too soon because that may further stoke the currency and curb exports. He expects the currency will peak in late 2009, reviving exports and delivering a 2.5 percent economic expansion in 2010. Both the central bank and the government want to ensure the next phase of growth in New Zealand is led by exports and investment, rather than consumption and borrowing. The period of growth prior to 2008 was fanned by a housing bubble and debt that left the economy vulnerable to the global slowdown. The currency’s rise is frustrating efforts by Finance Minister Bill English to produce an export-led recovery. “We are concerned about the New Zealand dollar,” English told Radio New Zealand today. “Ideally we want an export-led recovery. The high dollar is making it more difficult for the export sector to get off the floor.” Consumer Confidence The government’s strategy is to help exporters cope by lowering costs of doing business at home, because it is unable to do much to counter the currency’s gains, particularly against a weak U.S. dollar, he said. So far, the economic recovery is being led by consumer spending as the housing market improves and immigration increases. Household spending, which makes up 60 percent of the economy, rose 0.4 percent in the second quarter, the first gain in six quarters, yesterday’s report showed. A report today showed consumer confidence rose in the third quarter to its highest level in four years. Warehouse Group Ltd., the nation’s largest discount retailer, said on Sept. 11 that sales increased in the three months ended Aug. 2, the first quarterly gain since early 2008.

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