NZ dollar extends loss as market tips rate cut

The New Zealand dollar has kept falling, hitting a new two-month low, as the Christchurch earthquake has the market pricing in a 50 per cent chance of the central bank cutting interest rates.

The quake has seen traders cut their pricing for increases in the official cash rate to just 10 basis points over the coming 12 months, down from 50 points before the disaster, according to the Overnight Index Swap curve.

Reserve Bank Governor Alan Bollard announce a monetary policy statement on March 10, and until then, the currency is expected to hold above its current low at 74.31 US cents. The OCR is currently 3 per cent.

"Financial markets are looking at a high priority interest rate response to the event," said Chris Tennent-Brown, economist at ASB Institutional. "If the RBNZ delivered a cut, which would see the New Zealand dollar really struggling for the next little while."

The kiwi dropped to 74.46 US cents from 74.80 cents yesterday, and fell to 66.18 on the trade-weighted index of major trading partners' currencies from 66.48. It declined to 61.53 yen from 61.89 yen yesterday, and decreased to 74.36 Australian cents from 74.56 cents.

It fell to 54.16 euro cents from 54.54 cents yesterday, and slipped to 45.98 pence from 46.13 pence.

Tennent-Brown expects the currency will trade between 74.20 US cents and 74.80 cents until the central bank meeting.

Investors continued to eschew higher-yielding, or riskier, assets as the situation in Libya deteriorates, with leader Muammar Gaddafi attempting to crush an uprising.

"There's definitely risk-off going on around the world with the Middle East tensions, and high oil prices weighing on the global economy," Tennent-Brown said.

The Bank of England minutes from its last meeting showed growing support from members for a rate hike as the UK faces growing inflationary pressures, with the vote 6 to 3 in favour of a pause.