Dollar heads for 1.7% weekly decline after Reserve Bank rules out rate rises

The New Zealand dollar is heading for a 1.7 percent decline this week after Reserve Bank assistant governor John McDermott ruled out interest rate hikes ahead of the central bank's official cash rate review next week.

The kiwi fell to 75.63 US cents at 5pm in Wellington, from 76.94 cents at 8am on Monday. At the start of the week, five currency advisers in a BusinessDesk survey said the kiwi could fall, five said it could gain and three said it would likely remain largely unchanged.

The trade-weighted index, the broader measure of the currency preferred by the Reserve Bank, is headed for a 1.7 percent weekly decline after touching a nine-month high of 80.53 during the week. It was at 78.75 at 5pm from 80.09 on Monday.

The New Zealand dollar oscillated during the week, hitting a record against the euro and stoking speculation of parity with the Aussie before taking a dive yesterday after McDermott told a business lunch in Hamilton that the Reserve Bank isn't considering an increase in interest rates at present and is watching for any signs of weakening demand and domestic inflationary pressures that could warrant a rate cut. That prompted traders to take a more dovish stance ahead of next Thursday's official cash rate review.

"The market has seized on comment that if the inflation rate goes down or stays down then there may be room to cut rates down the track, and that's pulled the New Zealand dollar back this week," said Derek Rankin, director at Rankin Treasury Advisory. "I don't think they will change interest rates. The Reserve Bank is on hold, they have got low inflation which points to cutting interest rates and they have got property going off which points to raising interest rates and therefore they're in the middle and they are doing nothing."

Rankin said on the other side of the ledger, the US dollar is in a "choppy band" as traders mull whether weaker US first quarter economic data will pick up in the second quarter, or whether it signals a longer term trend which could push out looming US interest rate hikes.

The New Zealand dollar fell to 97.25 Australian cents from 98.26 cents on Monday, having touched a high of 99.59 cents during the week. Speculation it could reach parity this week evaporated after Australian inflation data printed in line with expectations.

The local currency slipped to 70 euro cents from 71.08 cents on Monday, having touched a record 72.02 cents during the week amid concerns that Greece could exit the common currency as it fails to make progress in reaching agreement on its debt repayments.

The kiwi declined to 50.25 British pence from 51.43 pence on Monday and fell to 90.38 yen from 91.38 yen.

(BusinessDesk)