Kiwi soars to 5-year high

By ELLEN READ AND AGENCIES

The New Zealand dollar hit a five-year high of 57.45USc early yesterday as the greenback spiralled on a United States Federal Reserve warning of continued economic risks.

By the close of local trade at 5pm yesterday it had eased slightly to 57.28USc.

The Fed left its benchmark interest rate at 1.25 per cent, as expected, but said the economy was at risk of further weakness and deflation.

This revived hopes of further US rate cuts which sent the greenback south, shunned by investors in favour of the euro and other higher-yield currencies (the Canadian, Australian and New Zealand dollars).

"It's not a kiwi story, it's very much on the US dollar move," said Westpac currency strategist Jonathan Bayley of the day's activity.

The move meant the kiwi has gained 4USc against the greenback in the past month. The euro has gained 8USc over the same period.

From here, the kiwi is expected to consolidate and move towards 58USc this month.

The trade-weighted index closed yesterday little changed at 61.3 from Tuesday's 61.44.

Despite the big move against the greenback, the kiwi was steady against other currencies.

The US Fed funds rate is at a four-decade low and significantly beneath Canada's overnight rate of 3.25 per cent, Australia's cash rate at 4.75 per cent and New Zealand's at 5.5 per cent.

The Australian dollar hit a fresh three-and-a-half-year high of 64.33USc while the Canadian currency went to US$1.404, a five-year record.

News from Australia that the Reserve Bank of Australia had left its benchmark interest rate on hold (at 4.75 per cent) was expected and had little effect on the kiwi's value against its Australian counterpart.

At close of trade the kiwi was buying 89.12Ac, down from 89.33Ac at the open.

Bayley expects a gradual depreciation in the kiwi/aussie exchange rate over the rest of the year, saying the cycle high had passed with January's top at 93.81Ac.

New Zealand growth is expected to moderate more quickly than Australia's this year, to the Australian dollar's advantage.

Though gradual, Bayley said threats to New Zealand dollar sentiment (currently the looming electricity crisis and poor business confidence) alongside the apparent shift in the timing of Reserve Bank easing may bring more pronounced weakness in the current quarter.