Dollar falls on OCR news

Photo / Kenny Rodger

The New Zealand dollar fell almost half a US cent after the Reserve Bank left the official cash rate unchanged at 3 per cent and said further rate hikes would be more moderate than previously flagged as Canterbury's earthquake undermines economic growth and fans inflation.

The Reserve Bank said the natural disaster left New Zealand "worse off" as inflationary pressures in construction and private rents in the Canterbury region increased, as well as causing
$4 billion worth of damage to residential, commercial, and government property.

"This takes the gloss off the New Zealand dollar for anyone looking for yield," said BNZ economist Doug Steel. "Now that the market's found out kiwi interest rates aren't going to go as high as they expected, the yield advantage is lessened."

The kiwi fell to 72.61 US cents immediately after Reserve Bank Governor Alan Bollard's announcement, having traded at 73.11 U.S beforehand. The New Zealand dollar also fell to 67.36 on the trade weighted index of major trading partners' currencies from 67.58 at 8pm last night.

It gained to 85.75 yen from 85.44 yen, and fell to 77.52 Australian cents from 77.94 cents. It fell to 55.89 euro cents from 56.39 cents, and down to 46.51 pence from 47.21 pence.

The yield on the benchmark 10-year government bond fell 8 basis points to 5.37 per cent.

"The earthquake that struck Canterbury on 4 September has significantly disrupted economic activity and is likely to do so for some time yet," Bollard said in a statement in Wellington today.

"The pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement."

Since the June MPS, Canterbury has been hit not only by the quake but also the failure of Timaru-based South Canterbury Finance, which made a $1.6 billion call on the retail guarantee.

"There was no chance of a rate hike by Dr. Bollard with the South Canterbury Finance issue hanging over the economy and the earthquake as well," said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia.

The kiwi also came under pressure overnight from offshore markets, as the US dollar staged its biggest daily gain against the yen in nearly two years, after the Bank of Japan spent as much as US$20 billion to weaken the yen and to ward off the threat of slowing the country's exports.

Finance Minister Yoshihiko Noda said Japan intervened in the currency market because of the impact of the yen's gains on the economy.

He said Japan would continue to take action, and had acted without foreign assistance.

The move comes a day after Japanese Prime Minister Naoto Kan won re-election as the head of the ruling party, beating a candidate who had promised action to weaken the yen.

"The kiwi was weaker overnight because of dollar strength, obviously caused by Bank of Japan selling yen and buying dollars,"
Kelleher said.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.3 per cent to 81.45 overnight.