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Dollar falls after Reserve Bank says kiwi's strength 'unjustified', stoking intervention talk

The New Zealand dollar shed almost one cent against the US dollar to a six-week low after Reserve Bank governor Graeme Wheeler said the currency's strength was "unjustified", invoking one of the central bank's criteria to intervene in the foreign exchange market.

The kiwi fell as low as 86.05 US cents, from 87.02 cents immediately before the central bank's 9am statement. It was recently trading at 86.21 US cents. The trade-weighted index, fell to 80.29 from 80.97 immediately before the statement.

Governor Wheeler today raised the official cash rate as expected for a fourth consecutive meeting to 3.5 percent in an attempt to slow inflation in an expanding economy driven by the rebuilding of earthquake damaged Christchurch, a strong housing market, elevated commodity prices and increased migration. Wheeler said today the speed and extent of further OCR increases will depending on the assessment of the rate rises and the implications of future economic and financial data for inflationary pressures.

Wheeler's comments were "slightly more dovish" than expected, said Westpac Banking Corp. senior market strategist Imre Speizer. The signal for a pause in interest rate hikes "was probably worth a little bit of fall in the kiwi," Speizer said. "The rest of the fall in the kiwi was driven by the strong language around the high currency. It was stronger language than we expected and it could be interpreted by some as a veiled intervention threat."

The Reserve Bank's intervention policy includes a requirement that the currency must be "unjustified" based on a range of economic fundamentals, and must be at an exceptionally high or exceptionally low point in the cycle.

The New Zealand dollar will probably continue its slide today below 86 US cents and may head towards 85.50 cents in the days ahead, Speizer said.

In his one-page statement today, Wheeler noted the decline in export prices for dairy products and timber, saying that "would reduce primary sector incomes over the coming year".

"With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall," Wheeler said.

Later this morning, Statistics New Zealand publishes the country's trade balance for June which is expected to show weaker export receipts.

(BusinessDesk)

Comments and questions
2

Any intervention by NZ to lower the currency is the equivalent of peeing into the ocean expecting to see a rise in level.

It's far more attractive for foreigners to put money on term deposit than it is for Kiwis given the tax of 33% paid by many savers and the 0% withheld for foreigners. Bring on Act's top tax rate of 24%!