Dollar rallies on expected steadiness of high interest rates

The dollar rose from a 20-month low yesterday, amid speculation its 7 per cent slide this year may be excessive because the central bank does not plan to cut interest rates from a record high this year.

It was buying US64.22c at 5pm from US63.30c in late trading on Tuesday.

The currency's slide this year makes it the world's worst-performing major currency.

It fell as low as US63.21c on Tuesday after Government figures showed retail sales stalled in January, fuelling expectations Reserve Bank Governor Alan Bollard may cut interest rates. Last week, Bollard said he was unlikely to cut the rate from 7.25 per cent this year unless domestic demand slowed more rapidly than he expected.

"The sticking point for the Reserve Bank is still inflation," said Sean Comber, markets economist at ANZ National Bank in Wellington. "It is likely to be September before the bank is comfortable that pressures have dissipated enough."

Government figures showed retail sales were unchanged in January after falling 0.3 per cent in December. Sales have increased just once in the past five months, fanning expectations that consumer spending is slowing.

Bollard also forecast last week that growth in domestic demand would slow to 1.6 per cent this year from 5.4 per cent in 2005. He cut his forecast for 2006 economic growth to 1.7 per cent from the 2.4 per cent predicted in December.

Bollard said consumer prices would rise 3.2 per cent in the year ending June 30, higher than the 1 per cent to 3 per cent range required to target.

Helping the kiwi's recovery was the greenback's decline against major currencies after a US Commerce Department report showed that country's current account deficit had widened to a record US$224.9 billion in the fourth quarter.

The local currency "got some respite in a market that sold US dollars", said John Kyriakopoulos, senior currency strategist at National Australia Bank in Sydney. Gains in the currency might be "harder to come by as the market grows more comfortable with the view that the Reserve Bank will be easing before year end".

- BLOOMBERG