'Growth and stability' stoke demand for kiwi dollar

BUSINESSDESK: New Zealand's growth prospects and its financial stability in a world contending with a European sovereign debt crisis and lukewarm US economy have stoked demand for the currency, Reserve Bank deputy governor Grant Spencer says.

Global investors have been happy to put their money in New Zealand because of its medium-term growth prospects, liquid market and relative calm, he told Parliament's finance and expenditure committee.

"If people look around and say 'where's a country that has a liquid market and also a prospect for growth in the medium-term?', we're one of the countries that come up," said Mr Spencer, who is tipped as a front-runner to replace governor Alan Bollard.

"We're a victim of our own reasonably good prospects in that sense."

He and Dr Bollard were quizzed by Opposition politicians about the volume of trading in the kiwi, which is typically the 11th or 12th most-traded currency in the world, and whether there were any mechanisms the central bank can use to devalue it.

The Green, Labour and New Zealand First parties have advocated more interventionist monetary policy in the last few weeks as exporters complained about the kiwi's strength, although it has slid from recent highs in the wake of European economic uncertainty and falling export commodity prices.

Dr Bollard told the committee the currency should unwind some of its gains as larger economies that printed money end those measures.

He also said intervention policies are generally too expensive to use.

"We want to see the highest currency that is consistent with our competitive position on a long-term sustainable basis," he said.

"But as it is reflected, we do think we've been on a higher level in recent months than that."

Earlier this month, Dr Bollard warned if the currency remained persistently high without an economic improvement to support that strength, he may have to cut the official cash rate from its record-low 2.5%.

Traders are betting the bank will cut the OCR by 27 basis points over the coming 12 months, according to the Overnight Index Swap curve.

Since April 29, the New Zealand dollar has shed 4.5% against the greenback, recently trading at 78.5 US cents, after fears over Europe's financial stability re-emerged after Spain's sovereign credit rating was cut two notches by Standard & Poor's.

The trade-weighted index has dropped 3.1% to 70.51 over the same period.

Dr Bollard told the committee the kiwi's liquidity improves access to funding, but that the heavy trading in the currency also has disadvantages, with "positions being taken that have no particular relationship to New Zealand's competitive position or to our trading needs".