By BRIAN FALLOW
WELLINGTON - The New Zealand dollar fell half a cent against its Australian counterpart yesterday after an unexpectedly sharp rise in interest rates by the Reserve Bank of Australia.
The bank raised the overnight cash rate from 5 to 5.5 per cent, where the weight of market expectations had been for an increase half that size.
The aussie dollar rallied on the news, climbing 64 points against the US dollar to 63.84USc.
But that did little to revive a wilting New Zealand dollar. It was unable to recover all of its overnight losses against the US dollar ending around 49.4USc in local trade yesterday, down from 49.6c on Tuesday.
The kiwi ended half a cent lower against the aussie, falling from 77.9Ac before the Reserve Bank moved to 77.4c in late local trade, off its lows of 77.15c.
The move puts Australia's overnight cash rate, the key to short-term interest rates, 25 points higher than New Zealand's.
Interest rate differentials with the United States are expected to widen as well, with the Federal Reserve tipped to raise the Fed funds rate from 5.5 to 5.75 this morning.
Negative interest rate differentials are one of the factors acting as a drag on the New Zealand dollar, along with concerns about the trade account and balance of payments, the prospect of a credit rating downgrade and some uncertainty arising from the change of Government. It has lost 1.5c against the US dollar since last Thursday.
Westpac's New Zealand general manager financial markets, Stephen Moir, said Friday's especially bad trade figures had spooked the market.
The resulting selling in an illiquid market had pushed the dollar down to levels that triggered further "stop-loss" selling. Stop-loss trigger points are levels investors have set at which they sell out rather than risk further falls. In the short term they exaggerate a market movement.
"Right now the NZ dollar is not getting much support at all, so there is this short-term weakness," Mr Moir said. There might be a few more months of bad news on the trade front, but the economic fundamentals were coming right.
The reasons the RBA cited for "pre-emptively" raising rates echoed those put forward by its New Zealand counterpart for doing the same thing in November and again last month:
* Stronger than expected domestic and international economic growth.
* Capacity utilisation is approaching previously cyclical highs and skilled staff are in short supply.
* International inflation on the rise, led by oil.
* Interest rates around the world are on the rise from the unusually low levels reached a year ago.
"All of the reasons given by Reserve Bank of Australia governor Ian MacFarlane for the increase in interest rates are valid for New Zealand," said WestpacTrust chief economist Bevan Graham.
It reinforced his expectation that the New Zealand Reserve Bank would raise its official cash rate 50 basis points at the March 15 monetary policy statement.
"We expect the cash rate to peak at 7 per cent in early 2001 compared with an Australian cash rate peak of 6.5 per cent and US Fed funds at 6.25 per cent," Mr Graham said.
"This helps to underpin our expectations of a firmer dollar as the year progresses."
Aussie unable to cheer wilting kiwi
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