Dollar falls as Reserve Bank looms; dairy fall-out continues

The New Zealand dollar fell on speculation Reserve Bank governor Graeme Wheeler may signal further delays to interest rate hikes tomorrow and amid concern a threat to contaminate infant formula may hurt orders for the nation's dairy products.

The kiwi dropped to 72.37 US cents at 5pm in Wellington from 72.62 cents at 8am and 72.99 cents yesterday. The trade-weighted index declined to 76.50 from 76.90 yesterday.

Traders are pricing in a 4 percent chance Wheeler will cut interest rates tomorrow as a strong currency and cheap oil feed into sluggish inflation, meaning he may need looser monetary policy to get the consumers price index up to the mid-point of his 1 percent-to-3 percent target band. Investors will also be watching to see whether he shifts the forecast track for the 90-day bank bill rate, often seen as a proxy for the official cash rate, with the pace of future hikes already trimmed in past quarterly reviews.

"At the last OCR statement he was more bullish than some were expecting, so do we see the RBNZ retract slightly from that?" said Stuart Ive, senior dealer foreign exchange at OMF in Wellington. "If there's any sign of a dovish tone the kiwi will get down to that low (71.70 US cents) more quickly than previously anticipated."

The local currency dropped after the government yesterday revealed threats to contaminate infant formula with poison, raising concerns about the security of New Zealand's biggest commodity export, dairy.

OMF's Ive said there were reports that some manufacturers of infant formula had orders reduced or halted after the threat, and that might add more weight to the kiwi.

New Zealand's government today posted an operating surplus in the seven months ended January 30 as it reaped more tax than expected.

A resurgent US dollar has also put pressure on New Zealand's currency as investors revise up their expectations the Federal Reserve will start lifting interest rates, reducing the appeal of countries such as New Zealand which have higher rates relative to the rest of the world.

New Zealand's two-year swap rate decreased to 3.525 at 5pm in Wellington from 3.535 yesterday and the 10-year swap rate fell to 3.825 from 3.875.

The kiwi declined to 95.21 Australian cents from 95.44 cents yesterday, and fell to 4.532 Chinese yuan from 4.5714 yuan. It sank to 87.84 yen from 88.90 yen yesterday.

The local currency dropped to 66.73 euro cents from 67.59 cents yesterday, and fell to 47.99 British pence from 49.38 pence.

(BusinessDesk)