KEY POINTS:
The New Zealand dollar stretched to yet another fresh 23-year high against the weakening US greenback yesterday and many currency watchers believe more gains are likely before growing signs of weakness in the domestic economy spark a sell-off.
The kiwi hit US81.83c in late morning trade, the latest in a series of fresh post-float highs this week, before closing yesterday at US81.46c.
However, the composite measure of the kiwi's strength against the currencies of our five major trading partners, or trade weighted index, remained more than 3 points off last year's post float high of 77.13 closing at 73.84. While the kiwi has gained against the greenback, yen, pound and euro since mid January, it has largely traded sideways against our largest trading partner Australia's currency.
The kiwi's 9 per cent gain against the greenback since mid-January is largely due to US dollar weakness, resulting from America's increasingly woeful economic prospects and a series of US Federal Reserve interest rate cuts in response.
On the other side of the equation, the kiwi has also been supported by our world-leading official interest rate of 8.25 per cent and the renewed appetite among investors to exploit the difference between our rate and those in other economies. Deutsche Bank currency strategist John Horner said the bulk of the bout of US dollar weakness had probably passed "but with the European economy holding up well relative to expectations the US dollar is likely to remain on the back foot in the near term".
US dollar weakness and continued strength in prices for most of the commodities New Zealand exports meant the kiwi would retain an upward bias in the near term, said Horner.
On the other hand, Bank of New Zealand currency strategist Danica Hampton said the economy was "far from a picture of health" and fundamentals argued against further gains by the kiwi against the greenback.
"Hedge funds and macro accounts continue to show an interest to sell the New Zealand dollar; presumably they share our view and are worried about the slowdown in the New Zealand economy [thanks to the crumbling housing market and sluggish household consumption]."
But Deutsche Bank's New Zealand chief economist Darren Gibbs said although there were plenty of signs the New Zealand economy was losing momentum, much of the evidence to date was merely anecdotal.
"The way that the currency's performing still on a trade weighted basis tells you that people aren't confident yet that we're turning down. People have been burned looking for this on a number of occasions in recent years."
