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The Reserve Bank of New Zealand has taken the extraordinary step of intervening in the money market to bring down the value of the New Zealand dollar.
The central bank has confirmed it intervened in the foreign exchange market, saying it regarded current levels of the exchange rate as exceptional and unjustified.
The NZ dollar tumbled more than 1 per cent against the US dollar today as currency traders in Asia cited rumours in the market that the RBNZ was intervening to sell the kiwi.
A few traders in Tokyo and Hong Kong cited talk of intervention by the central bank in explaining the New Zealand dollar's drop.
The kiwi slid to US75.25c from near US76.20c before the rumours circulated. The kiwi had struck a peak of US76.40c on Friday, the highest since the RBNZ allowed the currency to trade freely in 1985.
The kiwi also fell more than 1 per cent against the yen to near 91.60 yen, down from a 17-year high near 93 yen struck on Friday.
First NZ Capital's Brett Steven says the move may be unprecedented.
He thinks it is the first time the Reserve Bank has intervened since the currency was floated 22 years ago. He expects to see the dollar drop further as the European markets open overnight.
Finance Minister Michael Cullen said: "Today's action is a reminder to people if they over invest in the New Zealand dollar they could suffer losses."
The RBNZ said its intervention did not prejudge the future direction of monetary policy.
The RBNZ said in a statement this afternoon that it had intervened today to sell NZ dollars.
"As stated in our June Monetary Policy Statement, we regard current levels of the exchange rate as exceptional and unjustified in terms of the economic fundamentals," Reserve Bank Governor Alan Bollard said.
"This action does not prejudge the future direction of monetary policy, which as always will remain dependent on emerging economic trends.
"The action is consistent with clause 4(b) of the Policy Targets Agreement,which requires monetary policy to avoid unnecessary instability in the exchange rate," Dr Bollard said.
This is the first time the RBNZ has intervened under existing rules, and ANZ Investment Bank head of foreign exchange John Body said it appeared to have been effective.
"There was a price spike on Friday night which was unjustified, so it's really smoothed that price spike out.
"Two, it's quite a thin trading day being an Australian holiday, so the RB seems to have been very successful initially, but it will be interesting to see what the London market does.
"You'd have to suspect that London and US markets will try to take the kiwi lower, and I think we could see the kiwi trade down to US73.50c on the back of this," Mr Body said.
Intervention was initially an effective deterrent, but became less effective the more times it was used.
"Given it's their first time and it's clearly thought out, I think it's going to be highly effective."
It was too hard to identify how much the RBNZ had sold, he said.
- NZPA
