The New Zealand dollar was sold off today on rumours government officials have been talking to their Japanese counterparts with a view to halting investor appetite for uridashis -- New Zealand dollar-denominated bonds.
Investors, attracted by the country's high interest rates, have piled into the bonds -- to the tune of a record $25.3 billion in 2005.
But with the kiwi tipped for a fall as the economy begins to slow, the Reserve Bank and Treasury officials are thought to have held a "tete-a-tete" with Japanese officials over the risk of getting fingers burnt, should the kiwi dive sharply before the bonds mature.
Bank of New Zealand currency strategist, Sue Trinh, said the talks were rumoured to have led to the cancellation of a $600 million uridashi issue.
Cameron Bagrie, head of market economics and strategy at ANZ, told NZPA it was a case of "where there is smoke, there is probably fire".
The rumours saw the kiwi topple to a two-week low of US68.25c, before settling at US68.30c, compared with yesterday's US68.87c close.
A spokesman for Finance Minister Michael Cullen confirmed Treasury and RB officials had been talking with their Japanese counterparts about uridashi issuance.
He declined to comment on the exact nature of the talks, but stressed it was "normal practice".
Both RB governor Alan Bollard and Dr Cullen have made public speeches about the unnaturally high New Zealand dollar in recent months.
Japanese traders were very active in the kiwi market today. Forex dealers attributed the activity to the uridashi rumour, and also a heightened sense of risk following a massive dive on the Tokyo Stock Exchange overnight.
The exchange was forced to close early for the first time ever to prevent a feared system crash due to a trading stampede sparked by claims of fraud at internet firm Livedoor.
At one point the exchange was down almost 5 per cent. It clawed back to end down 2.94 per cent at 15,341.18.
It was not just the kiwi that fell from favour today. The Australian unit was also sold off.
The New Zealand dollar ended at 78.76 yen compared with 79.57 yen at yesterday's local close.
The Australian dollar was buying US74.67c against US74.91c late yesterday, while the New Zealand dollar declined to A91.48c (A91.89c).
Around $1 billion worth of uridashis are set to mature in early March. Those investors stand to profit from the kiwi's steep climb in the past year.
But Mr Bagrie said that investors buying 2-3 year bonds in 2005 would likely redeem their investment at the bottom of the currency cycle in 2007/2008, when the kiwi was expected to fall as low as US55c.
"Somebody is going to be left holding the baby," he said.
The following are Reuters currency rates:
5pm today 5pm Wednesday
NZ dlr/US dlr US68.30 US69.87
NZ dlr/Aust dlr A91.48 A91.89
NZ dlr/euro 0.5645 0.5688
NZ dlr/yen 78.76 79.57
NZ dlr/stg 38.76 39.01
NZ TWI 69.70 70.24
Australian dollar US74.67 US74.91
Euro/US dollar US1.2090 US1.2100
US dollar/yen 115.35 115.60
- NZPA
<EM>Currency:</EM> Dollar punished on account of rumours
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