Dollar slides as weaker dairy prices weigh on rate outlook, ECB meeting looms
The New Zealand dollar dropped as declining dairy prices raised concern about the country's biggest export commodity, and fuelled speculation the Reserve Bank might not hike interest rates as aggressively as expected.
The kiwi traded at 85.47 US cents at 5pm in Wellington from 85.58 cents at 8am, down from 86.02 cents yesterday. The trade-weighted index dropped to 79.97 from 80.37 yesterday.
Traders are questioning whether the Reserve Bank will raise the official cash rate as quickly as anticipated this year after dairy prices extended their decline at yesterday's GlobalDairyTrade auction. The local currency has been trading above the central bank's March projections, and weaker dairy prices would lead to a decline in the nation's terms of trade, which is seen as a key indicator for the kiwi's direction.
"It puts pressure on the kiwi because people get the sense the Reserve Bank might scale back its rate hike programme," said Imre Speizer, market strategist at Westpac Banking Corp in Auckland. "The risk is the OCR track gets downgraded and the market knowing that is happy to sell the kiwi so some extent."
The European Central Bank will review monetary policy in Brussels on Thursday, and tame inflation in the euro-zone has sparked speculation the regulator may cut rates or add stimulus to the regional economy. The kiwi fell to 62.12 euro cents from 62.31 cents yesterday.
Westpac's Speizer said if the ECB does loosen policy, it would lead to "very heavy euro selling" and weigh on the kiwi dollar against the greenback.
Reserve Bank of Australia governor Glenn Stevens told a business audience in Queensland today it was too early to say the transition to domestic-led growth from mining investment was smooth, though the early signs were positive. The kiwi declined to 92.69 Australian cents from 93.06 cents yesterday.
The local currency fell to 88.87 yen from 89.30 yen yesterday, and decreased to 51.37 British pence from 51.73 pence.