Impact of falling NZ dollar

Much news of late on the fall in value of the NZ dollar against the Greenback (US dollar) – the NZ dollar has shed more than 5% since the RBNZ’s November meeting – see mindmap for impact of a fall in the value of a currency and a table of some influencing factors.

Foreign currency market – supply and demand In a free market the rate of exchange is determined by the market forces of supply and demand. Where these conditions apply the exchange rate is said to free, fluctuating or floating. Therefore the following have a great impact on the rate of exchange in a free market: An increase in the demand for the $NZ will result from more people wanting get or buy $NZ.

• Increase in the value of exports

• Increase in tourists travelling to NZ

• Increase in foreign investment in NZ (buying assets / companies / depositing savings)

• Increase in NZer’s taking out loans overseas

An increase in the supply for the $NZ will result from more people wanting get or buy other currencies (as they have to supply $NZ to the market to get the other currencies)

• Increase in the value of imports

• Increase in NZer’s travelling to other countries

• Increase in NZ investment overseas

• Increase in NZer’s repaying loans made overseas

For these purposes NZ residents must obtain foreign currencies. Banks, acting on their behalf, will buy these currencies in the foreign exchange market and pay for them with dollars. Thus, an increase in NZ imports will increase the supply of dollars in the foreign exchange market. With floating exchange rates, changes in market demand and market supply of a currency cause a change in value. Below is a video on the falling NZD from OneNews.

Sign up to elearneconomics for comprehensive key notes with coloured illustrations, flash cards, written answers and multiple-choice tests on exchange rates that provides for users with different learning styles working at their own pace (anywhere at any time).