Dollar drops to six-year low as traders drive China's yuan lower

The New Zealand dollar dropped to a six-year low as investors latched onto a new regime in China where regulators will let the yuan trade more freely.

This will devalue the currency and putting pressure on nations which export to the world's second-biggest economy.

The kiwi fell as low as 64.70USc, trading at 64.87c at 5pm in Wellington from 65.42c at 8am and 65.52c yesterday. The local currency advanced to 4.1695 Chinese yuan from 4.1396 yuan yesterday.

China's currency extended its decline after markets were allowed to take it lower for a second day following the People's Bank of China's decision yesterday to depreciate the yuan and allow for more market influence in setting the daily fix.

The move weighs on nations such as Australia and New Zealand, which rely heavily on China to buy their products, as the value of export receipts diminishes.

"What they're essentially doing is a managed free float," ANZ Bank New Zealand senior FX strategist Sam Tuck says.  

"The assumption at the moment is China requires a lower currency rate because the market is telling us that, and that means Chinese demand is going to remain weak, therefore the Aussie and kiwi are being sent lower."

Mr Tuck says the offshore yuan rate indicated there was scope for another depreciation tomorrow, which will continue to weigh on the kiwi dollar, though "it's going to be a law of diminishing returns" in terms of the effect.

Traders will be watching for Chinese industrial production and retail sales figures out later today, and a speech by US Federal Reserve official William Dudley.

New Zealand's currency has already been declining as the Reserve Bank goes into a period of looser monetary policy. Falling dairy prices are weighing on the terms of trade.

The two-year swap rate fell to 2.83% from 2.86% yesterday, and 10-year swaps dropped to 3.57% from 3.64%.

The local currency gained to 89.60Ac 89.44c yesterday, and fell to 81.19 yen from 81.68 yen. It dropped to 58.56 euro cents from 59.67c yesterday, and fell to 41.69 British pence from 41.97 pence. The trade-weighted index decreased to 70.19 from 70.32 yesterday.

(BusinessDesk)