Kiwi falls against $US and aussie

By ELLEN READ

The Reserve Bank's decision to hold interest rates saw the New Zealand dollar drop against the United States and Australian currencies yesterday.

The kiwi retreated below 65USc and under 87Ac as the market reacted to the news that the official cash rate was staying at 5 per cent.

"It's taken a bit of heat out of the currency," Westpac senior currency strategist Johnathan Bayley said.

Having broken 65USc overnight, the kiwi went from 64.85USc before the news, to 64.53USc just after.

Bayley said that while it remained vulnerable to further profit taking against the greenback, any fall would be limited by the US currency's persistent weakness.

More dramatic was the fall against the Australian dollar. The kiwi lost almost 1c, dropping to 87.60Ac on confirmation that New Zealand's official rate will remain lower than Australia's.

With the official cash rate remaining at 5 per cent, New Zealand has relinquished its position as having the highest interest rate in the developed world. The Australian central bank lifted rates across the Tasman to 5.25 per cent on Wednesday.

The market appeared to read the Reserve Bank statement as saying it could take as long as March to hike rates, Bayley said,

"In which case the Australian cash rate could be 50 basis points higher by then and then it could be another five or six months until the RBNZ catches up again."

The Reserve Bank said that on a trade weighted basis the New Zealand dollar, which has risen about 4 per cent over the past quarter, was likely to stay at current levels (around 63.5) in the near term and then ease.

ASB chief economic Anthony Byett said these assumptions of the kiwi peaking around current levels could prove conservative.

"The RBNZ itself would agree that the risks of a higher-than-assumed New Zealand dollar are high," he said, adding that the kiwi was likely to be caught between the forces of a weak US dollar and strong Australian dollar, which was being buoyed by strong commodity prices and high local interest rates.

"The New Zealand dollar is likely to appreciate against most currencies over the next few months and probably remain around current-to-slightly-lower levels against the Australian."