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New Zealand seems to have strong economy and governed well by the RBNZ. Agreed that recent decrease in the dairy prices globally has some negative effects on the economy. But with the large service sector of the country, why is the Kiwi dollar weakening against USD, GBP, AUD, etc. in recent months? Is the economy of the country really in a bad shape?

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If you look at the NZD against the USD over the last 10 years, it looks like this:

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Obviously there has been a pretty sharp decline lately, but it's still not that far below the 10-year average of 74.27. It's also interesting to look at how it's been doing against the Australian dollar:

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As you can see, at 88c currently, the NZD is still well above its 10-year average against the AUD. Again, there's been a sharp dropoff of late -- NZD almost reached parity with the AUD quite recently.

In terms of why there has been a dropoff of late, I think you've hit the nail on the head regarding dairy prices. Dairy (including baby formula) accounts for a large share of NZ's exports, and dairy prices are at a 6-year low currently. Fonterra, the dairy exporter, is scrambling to restructure. That alone probably explains the majority of the NZD's recent decline against the AUD. I think the NZD decline more broadly against the USD is probably partially attributable to the weakness of the AUD -- New Zealand's economy has close ties with the Australian economy, and the Aussies have suffered from decreasing commodity prices. Also, it takes two countries to calculate an exchange rate, so when looking at the NZD's decline against the USD, you might note that the US economy has been doing quite well over the last few years (at least if you're naively tracking the DJIA or something).

Anyway, there's no need to panic about the NZ economy. Exporters benefit from a weak NZD. The tourism industry, another key sector in the NZ economy, benefits significantly from a weaker NZD also. If you're a Kiwi that likes to travel, and most seem to, the weak dollar isn't much fun, but such is life.

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  • $\begingroup$ Nice answer! However, I don't understand then why they don't talk about the benefit of sharp decline of NZD against USD. e.g., Though yesterday's Dairy Trade Auction did have 5.9% of decline measured in USD, NZD was lower by around 10% compared to USD than the previous auction. So wouldn't NZ (read Fonterra) get more NZD this time for the same quantity of sell compared to the last auction even with -5.9% decline? And hence the farmers will get more money in NZD already this time. Or something is wrong in this logic? $\endgroup$ – dbm Jul 2 '15 at 20:37
  • $\begingroup$ In the above comment, I just wanted to understand why the more (or at least comparable) return to the country and its farmers in NZD would not then settle the main issue the NZ economy tumbled for in the recent months. So, it is not a different question, but just a follow up comment to clarify the answer to the original question further. $\endgroup$ – dbm Jul 2 '15 at 20:39

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