The New Zealand Dollar reached $0.7565 on June 8, 6.7% above the January 2 value and the highest level in recent years. The Japanese yen, on the other hand has depreciated by 2.4% over the same period, as can be seen in the first chart that shows the daily exchange rates of the NZ dollar and the Yen. The rise in the New Zealand dollar has prompted the government to intervene in the exchange market. So far the intervention has had little effect. The task is a difficult one given the large size of the inflows and the small size of the resources of the high interest country.

The trends in the exchange rates of the two countries can, in part, be attributed to the so called "carry trade". Investors in the carry trade borrow funds where interest rates are low, Japan, for example, and invest them in high interest countries, New Zealand, for example. The second chart plots the daily difference between the yield of the 10-year bond in New Zealand and that in Japan. Over the past five years or so the difference has varied between 3.8% and 5.7%. Currently the difference between the two yields is almost 5%%, a spread that may appear to more than offset the interest rate and currency risks involved in the carry trade. The inflow of funds into the high interest country tends to put upward pressure on its currency and the outflow from the low interest rate country tends to dampen its currency.

The daily data on interest rates and exchange rates for most countries engaged in the 'carry trade" are found in the Haver database INTDAILY.