KEY POINTS:
A surprise $50 million trade deficit has pushed the dollar to a three-month low but commentators are divided over whether it signals the beginning of a long-term drop-off in its value.
The dollar dipped to US77.3c on Tuesday night, continuing on from a slide which saw it hit a 3 1/2-week low of US77.8c on Friday night, having hit a four-week high of nearly US80.4c last Wednesday.
At 5pm yesterday the dollar was at US77.64c.
CBA New Zealand economist Chris Tennent-Brown said Tuesday's trade deficit had come as a surprise in a month where trade was usually positive and had sent the dollar down by about a third of a cent. "It shows there are some weaknesses in the exportsector as well as from imports."
The deficit contrasted with a Reuters poll which had been pre-dicting a $395 million surplus and was only the second March deficit on record in the past decade.
Tennent-Brown said much of the weakness in the kiwi stemmed from a strengthening US dollar which had been buoyed by a change in attitude towards the Federal Reserve rate announcement due overnight.
"The market has quickly moved around from thinking it will be an aggressive cut to no cut at all.When you have got that kind of reasoning it pushes the US dollar up."
Tennent-Brown said CBA, which is the parent company of ASB Bank, expected the US economy to continue to turn around in the second half of the year as belief grew that the worst was over for the banking sector.
But he did not believe the recent drop in the New Zealand dollar would be the start of a significant decline.
"It could be, but people have been saying that for a long time and it keeps on picking up. New Zealand still has a relatively strong economy and high interest rates."
Tennent-Brown said what was of more concern was the strength of the Australian dollar and that NewZealand was losing out to investors.
"I think we will continue to drift, I don't think the New Zealand dollar will go ripping down to US60c. We are predicting the mid to low 70s over the next 12 months."
Royal Bank of Canada Capital Markets senior currency strategist Sue Trinh said the reasons behind the New Zealand dollar's weakness were twofold - a rally from the US dollar and weakness in New Zealand's domestic data.
"On the Kiwi side the domestic data has been in freefall. The Reserve Bank of New Zealand has toned down its stance on how long the interest rate will remain at the current level, meaning it may have been a little bit optimistic on the economic circumstances."
"We are moving away from atightening bias to neutral."
Trinh said she firmly believed the overall trend of the kiwi would be downwards and forecast it to hit US69c by the end of the year.
She said she was also concerned about the erosion of investment returns for Japanese investors which could see them stop buying New Zealand dollar uridashis and switch to other foreign currency denominated bonds.
In the second quarter of the year around $460 million worth is up for redemption but it will balloon to over $1 billion between the final quarter of 2008 and into 2009.
"This only adds to the myriad of fundamental headwinds facing the New Zealand dollar," Trinh said.
Meanwhile, the rally by the USdollar has also had a detrimental effect on commodities. They fell to a five-week low yesterday as investors chose the greenback over energy, metals, crops and livestock.
The weighted UBS Bloomberg Constant Maturity Commodity Index fell 1.9 per cent to 1508.21, the biggest drop since March 19.
While wheat prices tumbled to a five-month low, crude oil continued to slide and silver dropped almost 3 per cent.
