Why the NZ dollar has dropped US5c in less than a month

The NZ dollar has suffered while the US dollar has gone on a roll. Photo / Getty Images

Risk aversion and a strong greenback has driven the New Zealand dollar down by more than 5 US cents in less than a month.

Today the Kiwi traded at US64.87c - down from just under US70c on April 5 - and revisiting levels not seen since July 2020.

Meanwhile the US dollar has rallied, bolstered by investors seeking safe haven in response to heightened global uncertainty and expectations that the Federal Reserve is about to get more serious in its fight against inflation.

The US dollar this week surged to its highest level in two decades on the back of expectations that the Fed would hike rates more aggressively than other central banks.

This week, the widely followed ICE US dollar index hit 103.7 - its highest point since 2002.

While the Kiwi has taken a battering, it is in good company.

According to Bloomberg data, it was the second worst performer for spot returns over the last month, losing 5.9 per cent.

Only the Norwegian krone fared worse - dropping 8.3 per cent over the month.

The Japanese yen was the third worst performer, dropping by 5.6 per cent.

Out of the rest of the major currencies, only the Canadian dollar was least affected, falling by just 2.5 per cent.

Harbour Asset Management fixed income and currency strategist Hamish Pepper said risk aversion was driving the Kiwi down.

He said there are usually two main drivers for the Kiwi - interest rates and global risk sentiment.

"It's really been the latter that has been the biggest driver.

"We have had quite substantial declines in equities over the past month, and other measures of risk sentiment have also deteriorated."

America - with its big, deep capital markets - is seen as a safe haven in times of uncertainty.

In the debt markets, New Zealand interest rate movements are not that far removed from those in the US.

"Over the past month, we have kept pace with expected rate hikes," Pepper said.

The local market is now pricing in a succession of 50 basis points rate hikes from the Reserve Bank, following on from this month's 50-basis-point hike to 1.50 per cent.

A half-point hike is fully priced into May, and another for July. Market pricing is also building for a 50 basis point hike in August.

"In terms of the Kiwi versus US dollar, the story has been much more around risk aversion, which has weakened the Kiwi on that basis, than it has been the interest rate differential," Pepper said.

A weak Kiwi is good for exporters as it means their overseas earnings - settled in US dollars - translate into relatively more Kiwi dollars once they are repatriated.

For importers the impact is the opposite - they pay more Kiwi dollars for their US dollars to purchase goods overseas.