NZ dollar slips as Key says kiwi over-valued

File photo / NZ Herald

The New Zealand dollar fell to a month-low after Prime Minister John Key said he agreed with the Reserve Bank that the currency is over-valued and as traders anticipate an announcement from Fonterra Cooperative Group tomorrow which is expected to include a cut to the milk price forecast.

The kiwi fell to 85.31 US cents at 5pm in Wellington, from 85.63 cents at 8am and from 85.51 cents on Friday in New York. The trade-weighted index fell to 79.66 from 79.94 at the New York close.

Economists at ASB expect Fonterra to revise down its milk price payout for the 2014/15 season to about $6.20 per kilogram of milk solids, from its initial estimate of $7/kgMS.

Falling prices of dairy products are expected to contribute to a sharp decline in the nation's terms of trade from a 40-year high the bank said. Meantime, Key told his post-Cabinet media conference that he concurred with the central bank that the kiwi was too strong, a view expressed by governor Graeme Wheeler when he raised the official cash rate to 3.5 percent last week while signalling a pause in the tightening cycle.

"The kiwi came off after the RBNZ and it is not bouncing," said Martin Rudings, senior foreign exchange dealer at OMF. "The offshore market is showing it is still a bit long (kiwi). It's likely to go lower in the short term."

Asked if he was comfortable if the Reserve Bank intervened, Key said: "Yes. If they choose to do that they have a mandate under which to intervene."

"I think as a long-term policy tool they (intervention) are not very effective, but they can have a short-term benefit," Key said. "I would agree with the governor that the New Zealand dollar is overvalued if you compared it against a reduction in commodity prices. So you've seen some reduction since he's made those comments."

The US dollar index, a measure of the greenback against a basket of currencies, is at its highest level since early February as traders await offshore news this week including the Federal Open Market Committee meeting, which is expected to continue the move away from extraordinary policy, the first reading of second-quarter US gross domestic product, manufacturing and non-farm payrolls for July.

The local currency traded at 86.88 yen from 87.07 yen on Friday in New York, and edged down to 90.87 Australian cents from 90.99 cents. It traded at 63.55 euro cents from 63.65 cents last week, and was little changed at 50.27 British pence from 50.37 pence.