Dollar tumbles as economy goes backwards

The dollar plunged 1c to US61.5c today after unexpectedly gloomy GDP data showed the economy went into reverse at the end of last year.

Following the release of the GDP figures this morning, BNZ chief economist Tony Alexander said it showed the economy was not as strong as the Reserve Bank thought.

He said: "That makes us more certain there will be a cut in interest rates thus year." However, there would be no cut until December.

The National Party warned the fall in GDP -  the first in over three years - could be that start of a worrying trend.

Finance spokesman John Key said a repeat was likely in the March quarter meaning the country would be in a "technical recession".

Finance Minister Michael Cullen this morning warned the dollar was set to continue its downward spiral. 

In notes for a speech to a horticulture seminar, Dr Cullen said the exchange rate had at last "come unstuck from the unrealistic heights" it had sat at since 2003.

"Since peaking just over 74 US cents last year, and hovering around the 70 cents mark for several months, it now appears firmly headed below US64cents," Dr Cullen said.

"There certainly appear to be sufficient downward pressures to maintain that trend."

Dr Cullen's speech was delivered at midday, but prepared before the announcement that the economy had shrunk in the December quarter by 0.1 per cent.

He said in the notes the current slowdown was "firmly in the soft landing category" and cited economists predicting growth would bottom out around 1.5 per cent before increasing again.

"On the domestic front, there are a number of factors that augur well for a speedy recovery," he said. Unemployment was low and would remain so, thus boosting income growth.

Personal wealth growth through increased housing prices would ease "significantly" but Dr Cullen did not predict significant housing price declines.

In his speech, he was not prepared to speculate how fast or how far the dollar would fall.

The fall would be good news for exporters, but would increase the price of imports, boosting inflation and reducing household disposable incomes.

- NZPA, NEWSTALK ZB