Dollar trades below 87USc amid speculation on slower pace of rate hikes

The New Zealand dollar fell to its lowest level in three weeks amid speculation the Reserve Bank may use its interest rate review next week to signal a slower pace of rate hikes, tarnishing the appeal of the currency's high yield.

The kiwi traded at 86.93 US cents at 5pm in Wellington, having earlier fallen as low as 86.83 cents, from 86.98 cents late yesterday. The trade-weighted index fell to 80.96 from 81.04.

Most economists still expect Reserve Bank governor Graeme Wheeler to raise the official cash rate a quarter-point to 3.5 percent on July 24 but he may tweak the wording of what is typically a one-page statement at the six-weekly review to indicate he won't rush to raise the OCR again. Weaker dairy prices threaten to slow the pace of the New Zealand economy, where inflation has remained relatively benign.

"The economy is still growing above potential and rates will need to go higher," said Robin Clements, economist at UBS New Zealand. "But do they go at every opportunity? Maybe not."

Swap rates dropped yesterday as the market adjusted its bets on the track of interest rates following figures that showed non-tradable inflation was almost half the pace the central bank was expecting in the second quarter. Adding to that, dairy prices fell to the lowest level since December 2012 in this week's GlobalDairyTrade auction and have slumped by about one third this year.

AMP Capital New Zealand, which manages more than $18 billion of assets, said at its quarterly briefing in Wellington today that it was underweight the New Zealand dollar even while holding more cash than the size of its portfolios would suggest.

"We have got an increasingly unjustified strong currency, especially after the most recent decline in commodity prices," AMP Capital chief economist Bevan Graham said. "The currency is so high, fundamentals have turned against it, it's just a matter of time before we see some downside."

The kiwi increased to 64.25 euro cents from 64.14 euro cents late yesterday and traded at 50.70 British pence from 50.83 pence. It fell to 88.20 yen from 88.49 yen and dropped to 92.78 Australian cents from 93.13 cents.

(BusinessDesk)