The New Zealand dollar dropped almost a cent after the Reserve Bank decided not to raise interest rates at its review today, disappointing some investors who had bet on a hike.
The kiwi dropped as low as 81.70 US cents from 82.65 cents immediately before the 9am announcement. It recently traded at 82.02 cents.
Reserve Bank governor Graeme Wheeler kept the official cash rate at 2.5 percent, but said the rate would have to rise "soon" as inflationary pressures escalate in an economy with "considerable momentum". While most expected rates to remain unchanged until March, some bet stronger inflation and reviving growth would prompt the bank to hike today.
"The market had priced in a 30 percent chance that they would hike today, they didn't hike but they gave you a signal for March," said Imre Speizer, senior market strategist at Westpac Banking Corp. "The reaction is not surprising but I don't think it will run away too much further. It will find a base soon and over the day people will read it and focus on the March hike instead."
The kiwi is likely to find buyer support at 81.80 US cents, Speizer said.
The central bank "does not believe the current level of the exchange rate is sustainable in the long-run," governor Wheeler said in his one-page statement today.
An hour before the RBNZ decision, the US Federal Reserve said it would reduce its monthly bond purchase programme next month by a further US$10 billion to US$65 billion as expected. A reduction in the programme supports the greenback because it reduces the amount of US dollars in circulation, boosting its value.
Later today, traders will be eyeing reports on Chinese manufacturing and US fourth quarter growth. In New Zealand, data on building consents and migration for December are scheduled for release at 10:45am.
The New Zealand dollar fell to 83.80 yen from 85.46 yen at 5pm yesterday as investors favoured safe haven currencies on concern about the impact of the Fed's tapering on emerging markets.
The kiwi slipped to 93.83 Australian cents from 94.06 cents yesterday and weakened to 60.06 euro cents from 60.65 cents.
The local currency dropped to 49.54 British pence from 49.95 pence yesterday after Bank of England Governor Mark Carney reiterated that the bank is in no rush to raise rates. The trade-weighted index fell to 77.65 from 78.38 yesterday.