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Kiwi falls on reports of China destroying NZ milk, Fonterra plays down scare

The New Zealand dollar fell in local trading after reports China's quarantine administration destroyed three different brands of locally-produced milk powder, reigniting fears about the quality of the country's biggest export.

The kiwi shed half a US cent in the local session on the initial reports, recovering by 5pm to trade at 84.30 US cents from 84.51 cents this morning and 84.40 cents yesterday. The trade-weighted index fell to 76.72 from 76.93 yesterday.

The local currency immediately dropped after headlines emerged stating Chinese officials destroyed New Zealand milk powder. Food quality is a touchy issue for New Zealand after a recent scare over the presence of a benign chemical being found in Fonterra's milk powder last month.

Fonterra downplayed today's headlines, with a spokesman telling BusinessDesk it is part of a regular quarterly review by Chinese officials of what products are removed, and typically comes down to labelling.

None of the brands were Fonterra's, he said.

"The market really focuses in on food quality, which can be a bit hard to get to the bottom of things," says Chris Tennent-Brown, FX economist at Commonwealth Bank of Australia in Sydney. "I would be surprised if anything happened to knock the kiwi out of the 83 to 85 US cents range it's managed to hang on to through February."

New Zealand's currency has been marching higher through much of this year as investors get drawn to the relatively high returns on offer and the prospect of a recovering economy.

The Reserve Bank of Australia is seeing signs of low interest rates creeping into the rest of the country's economy, though low inflation means there is room for further cuts if need be, according to minutes from this month's policy meeting.

The kiwi fell to 81.65 Australian cents from 82.05 cents yesterday.

It fell to 78.97 yen from 79.42 yen yesterday, and decreased to 63.14 euro cents from 63.32 cents. It was little changed at 54.50 British pence from 54.53 pence.