NZ dollar hits lowest in almost 5 years

File photo / NZ Herald

The New Zealand dollar hit its lowest level in almost five years over the long weekend as traders favour the greenback amid growing expectations that the Reserve Bank will cut interest rates next week while the US Federal Reserve moves towards rate hikes.

The kiwi touched 70.65 US cents in an illiquid market during the Queens Birthday public holiday yesterday, its lowest level since August 2010.

It was trading at 70.83 US cents at 8am in Wellington, from 71.02 cents at 5pm yesterday, 71 cents at the New York close last week and 71.42 cents at 5pm in Wellington on Friday.

The trade-weighted index was at 74.60 from 74.88 on Friday.

The kiwi has been out of favour with investors as weaker than expected dairy prices dent farmer incomes and after the government and the Reserve Bank stepped up measures to curb Auckland's bubbling housing market, stoking speculation the move would free up the Reserve Bank to cut interest rates, reducing the yield appeal of the currency.

Traders are pricing in a 54 per cent chance the Reserve Bank will cut rates at next week's meeting, according to the Overnight Index Swap Curve.

"A number of banks over the last two or three weeks are calling for interest rate cuts, so the market is now starting to factor that into the kiwi price," said Matt Blackwell, a director at OMF.

"The (US) dollar is getting stronger so naturally there is a bias for kiwi and Aussie to get weaker," Blackwell said.

"You have had an underlying trend of dollar strength with the market expecting at some point the Fed are going to start tightening interest rates back in the US, that has been pushed from June out to September but the underlying theme has been one of dollar strength."

OMF's Blackwell expects the Reserve Bank to reduce rates by 25 basis points in June and again in July, taking the benchmark to 3 per cent.

He said the kiwi is likely to fall to between 65 US cents and 68 cents over the next few months.

Tonight, traders will be eyeing the latest GlobalDairyTrade auction to see if price declines have stabilised. Dairy products are New Zealand's largest commodity export.

Today, Statistics New Zealand publishes first quarter terms of trade data at 10.45am.

The New Zealand dollar was little changed at 93.11 Australian cents from 93.13 cents on Friday, ahead of today's Reserve Bank of Australia meeting, where no policy change is anticipated.

The kiwi slipped to 64.84 euro cents from 65.18 cents on Friday. Traders will be looking to the end of the week amid concerns Greece won't have enough cash to make a repayment to the International Monetary Fund on Friday.

The local currency edged up to 46.61 British pence from 46.57 pence on Friday and to 88.41 yen from 88.36 yen.