Dollar Outlook: Kiwi may grind higher as greenback stays out of favour

The New Zealand dollar may grind higher as investors continue to eschew the greenback amid concern foreign central banks are fretting over their exposure to the world's reserve currency as the US stacks up debt to revive its economy.

Six of seven economists and strategists in a BusinessWire survey say the currency may push near a 13-month high this week as investors unwind their US dollar holdings.

The last one agreed there was scope for the kiwi dollar to break higher, but said it was reliant on a weaker greenback. The Dollar Index, a measure of the greenback versus the pound, euro, yen, Canadian dollar, the Swiss franc and Swedish krona, held near a 12-mont low of 76.77 as the prospect of Asian central banks unwinding their holdings in US dollar assets weighed on the currency.

David Dollar, the US Treasury's economic and financial emissary to China said on Friday that China "has a huge amount of reserves and it makes some sense to diversify what you put these reserves (into)."

He made the comments at a meeting of the World Economic Forum in the northeast Chinese city of Dalian. Foreign central banks are concerned the US Federal Reserve's extraordinary measures will stoke inflation and erode the value of the greenback.

The U.S has committed more than US$12 trillion in loans, fiscal stimulus and bailout measures to revive the world's biggest economy.

"Concerns that China and other Asian central banks were stepping up their efforts to diversify out of US dollar assets weighed heavily on the dollar," said Danica Hampton, currency strategist at Bank of New Zealand.

"Not only will a weakening US dollar erode the value of China's and Japan's holdings of US government bonds, but weekend media reports highlight the financial stability risks associated with a sharply weaker dollar."

Hampton was the only strategist not willing to predict a stronger kiwi dollar this week, saying any gains in the currency will rely on further greenback weakness.

An out-of-favour greenback has sent investors to alternative investment such as gold and the yen.

Gold, which is often used by investors to hedge against inflation, rose 1 per cent to an 18-month high US$1,006.40 per ounce on the New York Mercantile Exchange on Friday. China, the world's largest gold producer, has reportedly been stockpiling the precious metal.

The kiwi dollar weakened after retail sales unexpectedly fell in July. Sales declined 0.5 per cent from June, according to data from Statistics New Zealand, suggesting a recovery in consumer spending may be curbed by rising unemployment and households' efforts to pay down debt. The kiwi fell to 69.84 US cents from 70.35 cents on Friday in New York.

Signs of stabilisation in the property sector should underpin the kiwi dollar, said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney. The median house price rose to $346,500 last month from $340,000 in July, according to Real Estate Institute data out today.

"Retail sales are pretty much old news, with the REINZ house price data, which is more recent, greater than expected," Trinh said. "The housing market's running well ahead of Reserve Bank forecasts and will help the kiwi dollar."

Trinh expects the currency to trade between 70 US cents and 70.89 cents this week. If it breaks through the top of the range, "there's nothing stopping it going to 72.20 cents."

Central bank Governor Alan Bollard said a resurgent property market could be a threat to rebalancing New Zealand's economy if it encourages households to return to their "borrow and spend" mentality. Still, he talked down the prospect of another housing bubble in his official monetary statement last week, saying the 4.4 per cent gain in property prices over the past four months was due to an unusually low number of dwellings for sale, amid tight demand conditions.

Five of seven strategists surveyed by BusinessWire predict the currency will trade in a range on a trade-weighted basis this week, with the Australian and yen crosses likely to come under pressure.

Two others expect the US dollar weakness to drive the index higher. The New Zealand dollar fell to 63.99 on the trade-weighted index, or TWI, from 64.17 on Friday in New York, and dropped to 48.09 euro cents from 48.21 cents.

Khoon Goh, senior markets economist at ANZ National Bank expects the Australian cross to come under pressure this week as New Zealand's economy lags behind its trans-Tasman neighbour.

The Reserve Bank of Australia is scheduled to release the minutes of its last meeting tomorrow. The minutes may help explain why the RBA didn't hint at interest rate rises after the Australian economy skirted recession.The kiwi rose to 81.61 Australian cents from 81.63 cents on Friday in New York.

"There's clear divergence in the respective economies and central banks" which should see the kiwi dollar fall against its trans-Tasman counterpart, Goh said.

"The Reserve Bank of Australia has moved to neutral and has pointed to pushing rates higher, while the Reserve Bank here was very clear that it will keep rates low, or even head lower until late next year."

Traders are betting Bollard will boost rates earlier than he has indicated, Trinh said. "The RBNZ's threat to keep rates low just isn't credible," she said. "The markets have seen through that and have boosted their forecasts accordingly."

Traders are pricing rate hikes to the OCR of 84 basis points in the next 12 months, according to an index compiled by Credit Suisse Group. That's down from 101 basis points last week, when the RBNZ reiterated that rates will stay low until later in 2010.

Hampton said the yen could continue to gain this week if data out of the US painted a grim picture. The kiwi fell to 63.34 yen from 63.95 yen on Friday in New York.

"Yen strength could trigger an unwinding of carry trade funding" and take some of the gloss from the kiwi, she said.

Later in the week the US is scheduled to release data on retail sales, the consumer price index, housing figures and the current account.

-BUSINESSWIRE