Dollar edges near record

Reserve Bank Governor Graeme Wheeler warned in May the bank considered the kiwi was overvalued. Photo / Mark Mitchell

New post-float high on the cards, despite central bank warnings on kiwi’s strength: experts

There were no hints of intervention in the foreign exchange market by the Reserve Bank yesterday despite the New Zealand dollar coming within striking distance of its highest point against the US dollar since floating in 1985.

At yesterday afternoon's level of US87.96c, the currency was just short of its post-1985 float high of US88.42c, set on August 1, 2011, and at a record high of 81.72 on its trade-weighted index.

Foreign exchange strategists said a push beyond the 2011 NZ/US dollar record was possible over the next few days, despite warnings from the Reserve Bank about the currency's strength.

In a speech to dairy farmers on May 7, Reserve Bank Governor Graeme Wheeler said the currency had remained high, despite sharp declines in dairy prices.

"The Reserve Bank considers that the exchange rate is overvalued and does not believe its current level is sustainable," Wheeler said at that time adding: "If the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell NZ dollars."

The central bank's only public communication yesterday was a speech from Assistant Governor John McDermott titled "Potential output and the monetary policy framework", in which the value of the currency did not rate a mention.

"You would expect the Reserve Bank to be talking a lot more about the currency before they actually pulled the trigger," said ANZ senior foreign exchange strategist Sam Tuck.

The Reserve Bank has four criteria which need to be met before it intervenes to try to counteract adverse movements in the currency - the exchange rate must be exceptionally high or low, the exchange rate must be unjustified by economic fundamentals, intervention must be consistent with the policy targets agreement it has with the Government, and conditions in markets must be opportune and allow intervention a reasonable chance of success.

Westpac senior markets strategist Imre Speizer said all criteria had been met, with the exception of the last one, and that the central bank was unlikely to regard current conditions as opportune.

Early last year, when the kiwi was around US83c, the bank confirmed it had intervened in foreign exchange markets in an attempt to curtail the currency.

Just as in 2011, strategists said the New Zealand dollar's strength was more to do with US dollar weakness than Kiwi-specific factors, although an overnight credit rating outlook upgrade by Fitch and the prospect of higher domestic interest rates were clearly supportive for the kiwi.

Heading higher

• US87.96c yesterday - just short of its post 1985 float high of US88.42c.
• Kiwi is at a record high of 81.72 on its trade-weighted index.
• Early last year, when kiwi was around US83c, the Reserve Bank confirmed that it had intervened in foreign exchange markets.