Dollar falls as govt move on housing market seen to free up Reserve Bank for rate cuts

The New Zealand dollar fell after the government stepped up measures to curb Auckland's bubbling housing market, stoking speculation the move would free up the Reserve Bank to reduce interest rates.

The kiwi dropped to 74.26 US cents at 8am in Wellington, from 74.72 cents at the New York close and 74.74 cents at 5pm in Wellington on Friday. The trade-weighted index declined to 76.20 from 76.63 on Friday.

The government announced at the weekend that it will give the Inland Revenue Department an extra $29 million in this year's budget to chase property investors, tighten rules on investment gains and link transactions to IRD numbers while it assesses a withholding tax for foreigners, in a response to the growing fears about the pace of Auckland house price inflation. Stepping up measures to tackle the housing market is seen as giving the Reserve Bank additional freedom to reduce interest rates as it eyes weaker dairy commodity prices and an elevated currency.

"The New Zealand dollar has opened lower this morning on news that the government is also increasing measures to cool the housing market," ANZ Bank New Zealand senior economist Sharon Zollner and senior FX strategist Sam Tuck said in a note. "This should free the RBNZ up to consider other factors, including New Zealand dollar strength."

ANZ last week changed its call for interest rates, saying the Reserve Bank could reduce the 3.5 percent benchmark as early as its meeting next month and follow up with another cut in July to take the rate to 3 percent. Deutsche Bank and RBC Capital Markets are also forecasting a cut next month, while ASB Bank and First NZ Capital expect the first reduction to come in September.

Traders are pricing in a 46 percent chance that the Reserve Bank will reduce interest rates at its June 11 meeting, according to the Overnight Index Swap Curve.

ANZ expects the kiwi to trade between 74 US cents at 75.40 cents today.

In New Zealand today, the BNZ-BusinessNZ Performance of Services Index is due out at 10:30am.

The New Zealand dollar dropped to 92.35 Australian cents from 92.73 cents on Friday, fell to 47.18 British pence from 47.38 pence, declined to 64.91 euro cents from 65.49 cents and slid to 88.58 yen from 89.21 yen.

(BusinessDesk)