Dollar falls after Bollard cites strength hampering economy

Thursday 30th July 2009

The New Zealand dollar tumbled 1.3% to as low as 64.78 US cents after central bank Governor Alan Bollard held interest rates at a record-low 2.5% and said a strong currency is adding strain to the forecast recovery in the economy.

The Reserve Bank kept the official cash rate on hold saying the economy, which is in its deepest recession in 30 years, remains weak. A stronger than forecast kiwi dollar hinders “the sustainability of future growth” and adds further risks to the recovery.

The kiwi was already under pressure before the statement as a drop in Chinese stocks yesterday prompted investors to eschew higher yielding currencies in favour of the relative safety of the US dollar. The Dollar Index, a measure of the greenback versus six trading partners, rose 0.6% to 79.52.

“The Reserve Bank have once again voiced concerns about the level of the kiwi dollar, which is not helping the sustainability of future growth,” said Mike Symonds, head of sales and foreign exchange at Bank of New Zealand. The central bank’s statement may make global currency markets pay more attention to domestic news, though “the path of the kiwi-US cross is heavily influenced by US dollar.”

The kiwi tumbled to 64.90 US cents from 65.65 cents immediately before the central bank’s statement, and traded at 65.61 cents yesterday. It sank to 61.03 on the trade-weighted index, or TWI, a measure of the currency versus the greenback, Australian dollar, yen, euro and pound, from 61.74 before the statement, and it was at 61.48 yesterday.

The New Zealand dollar slipped to 61.85 yen from 62.14 yen yesterday, and dropped to 79.64 Australian cents from 80.02 cents. It was little changed at 46.32 euro cents from 46.38 cents yesterday.

Symonds said the currency may trade between 64.70 US cents and 65.40 cents today, and faces a “high risk of further corrections in the next 24 hours.”

It could fall to the mid-64 cents range, but he doubts it will fall back to the lows it experienced earlier this year, when it sank below 50 US cents.

Bollard said the outlook was “highly uncertain” with the increase in global commodity prices not flowing into raw materials produced in New Zealand.

Commodity prices took a knock yesterday, with the Reuters/Jefferies CRB index, a measure of the price of 19 raw materials, slid 2.7%.

The strength in the currency, which has climbed as much as 32% since its low in March, has been a cause of concern for exporters in recent months. Fonterra Cooperative Group chairman Henry van der Heyden yesterday said the exchange rate was putting downward pressure on milk prices when he announced a steady outlook for prices yesterday.

At $4.55 per kilogram of milk solids, the world’s largest exporter of dairy products forecast payout to farmers this season is 13% lower than last year’s $5.20 per kg.

Businesswire.co.nz

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