Dollar drops to three-week low as investors bet currency may not advance further

The New Zealand dollar fell to its lowest in more than three weeks overnight as investors took profits on the expectation the local currency may not advance further.

The kiwi touched 85.19 US cents early this morning and was trading at 85.28 cents at 8am in Wellington from 85.75 cents at 5pm yesterday. The trade-weighted index slipped to 79.42 from 79.78 yesterday.

Demand for the nation's currency pushed the kiwi to a two-and-a-half year high of 87.44 US cents on April 10, however the kiwi has been in decline since then on the expectation higher interest rates are already priced in to its value and it may not appreciate further. The Reserve Bank has raised the benchmark rate two times in as many months and is expected to continue hiking to curb inflation.

"Everything is priced in for the kiwi in terms of these rate rises and when you are at elevated levels, you have only one place to go," said Stuart Ive, senior advisor at OMF. "People are quite happy to sell the kiwi at elevated levels that we are seeing currently and it does appear that it is beginning to struggle a little bit."

Escalating tensions in the Ukraine and an expected continuation of tapering at this week's Federal Reserve meeting are also weighing on the kiwi, Ive said.

The currency may trade between 84.90 US cents and 85.80 cents today, Ive said.

Later today, traders will be eyeing New Zealand's latest trade figures for March, scheduled for release at 10:45am. The Reserve Bank also publishes data on high-debt mortgage lending at 3pm.

There was little currency reaction to this morning's release of the Labour Party's proposed changes to the Reserve Bank Act, which aims to broaden the central bank's objective. The kiwi was trading at 85.31 US cents at 8:30am from 85.28 cents at 8am, immediately before the release of the policy.

September's election is probably still too far away for proposed policy changes to impact the currency, said OMF's Ive.

Japanese banks are closed today in observance of Showa Day.

The New Zealand dollar dropped to 92.17 Australian cents from 92.36 cents yesterday, fell to 61.61 euro cents from 62.03 cents, slipped to 50.77 British pence from 51.07 pence and declined to 87.47 yen from 87.60 yen.

(BusinessDesk)