KEY POINTS:
New Zealand dollar investors yesterday showed few signs of being worried by Finance Minister Michael Cullen's threat to suspend current monetary policy.
The kiwi hit a new 22-year post-float high against the greenback early yesterday. It peaked at US79.45c but eased back to US79.12c by the close, slightly down on Wednesday's US79.32c finish. Commentators have been perplexed about the motives for Cullen's repeated references this week to the special powers he has over the central bank.
Yesterday he said he had wanted to warn foreign investors the kiwi was not a one-way bet. He told journalists and Parliament he had been deliberately trying to raise awareness of his never-used power to suspend his agreement with the Reserve Bank to target inflation. Such a move would be unprecedented in New Zealand since the Reserve Bank was set up 20 years ago as an independent body to combat inflation.
"I am just trying to point out to people there are risks they might not be aware of," Cullen said.
Asked if he was just playing a game to try and scare the markets, Cullen said his power was real. "No government should tell the financial market speculators when it might use such a provision."
However, the likelihood of another rate rise this month and the persistent weakness of the US dollar have had more sway on the kiwi. The US dollar softened further across the board overnight after Federal Reserve chairman Ben Bernanke said US housing woes could get worse before they get better.
The kiwi eased against the Australian dollar to A90.16c from A90.30c at 5pm on Wednesday and the trade weighted index eased to 75.65 after hitting a record 76.08 on Wednesday.
Bank of New Zealand currency strategist Danica Hampton said the NZ dollar had been underpinned during the past few days by heightened speculation about further rate hikes by the Reserve Bank.
But market participants could not ignore the increasing political backchat surrounding monetary policy and the NZ dollar, she said.
The ANZ Bank said Cullen's comments were "merely currency jawboning", but they did reinforce the point that while the Reserve Bank had independence, it was merely operational independence and its continuation resided with the discretion of the Government.
Meanwhile, the US dollar stayed near a record low against the euro and a 26-year trough versus sterling.
In a testimony before Congress, Ben Bernanke repeated that inflation was the Fed's top concern but said weakness in the housing sector would likely crimp growth in the coming quarters. The Fed has also lowered its forecasts for US economic growth for 2007 and 2008.
- REUTERS
