KEY POINTS:
Intervening in foreign exchange markets is about sending a "signal" to currency speculators that the kiwi is too high, says the Reserve Bank.
Two weeks after it first intervened, the central bank has clarified its policy, in an opinion piece today by Deputy Governor Grant Spencer, stating it is likely to make a profit on the exercise.
He reiterates the bank's view that selling New Zealand dollars is not aimed at defending a particular level in the currency. Rather it "can help to moderate the 'peaks' in the exchange".
"It sends a signal that, in the bank's view, the exchange rate is out of alignment with the economic fundamentals," Spencer writes. "Those speculating in the New Zealand dollar need to be aware that the exchange rate is not a one-way bet."
The kiwi posted a fresh 22-year high of US76.95c in New York trade on Tuesday night. In local trading yesterday, it fell as low as US76.26c as the yen strengthened. It closed at US76.36c.
Deutsche Bank chief economist Darren Gibbs says the Reserve Bank "is being suitably modest about what it can hope to achieve".
"What the bank is signalling is that in its view we're not too far away from the point where the fundamentals will begin to turn," he says.
The Reserve Bank has indicated that a sustained drop in the currency will come about only with an economic slowdown and lower interest rates.
After intervening this month for the first time in the 22 years that the dollar has been a floating currency, the Reserve Bank faced criticism that trying to bring the currency lower conflicted with its attempt to quash inflation with higher interest rates.
It was seen as a signal that the bank believed it had conquered inflation and would not need to raise rates again. But Spencer today indicates another rate rise is still possible.
"Intervention is about seeking to moderate the trend in the exchange rate and rebalancing monetary policy pressure," he writes.
"It does not fundamentally alter monetary policy and does not signal a future easing of conditions."
