The New Zealand dollar tumbled almost one-and-a-half US cents in 24 hours on dour economic forecasts and hopes the Reserve Bank's monetary tightening cycle has ended.
The Reserve Bank, as expected, hiked interest rates by a quarter of a percentage point to 7.25 per cent, but instead of that sending the currency higher as is usual to such a move, the currency dived.
It ended at US69.70c compared with US71.13c at yesterday's close. It fell almost as hard against the Australian dollar -- to A93.60c from A94.84c.
Today's quarterly statement from the RB did not rule out further rate rises and said cuts were not in prospect for the foreseeable future.
However, economists said the tone was more dovish than expected and the bank acknowledged risks of a hard economic landing and rate cuts.
"There's a feeling that they're backed off the reasonably forthright comments they made in October," BNZ chief dealer Mike Symonds said.
"That is in essence is what's behind the rally we've seen in money markets and the softening in the kiwi."
He said some dealers had interpreted it as the end of the tightening cycle.
"Time will tell if that's the case," he said.
There was a danger of markets getting ahead of the Reserve Bank and it resumed its tightening cycle.
"But the risks are growing that the kiwi has seen its peak. It's a little bit premature to suggest with confidence that's the case."
Mr Symonds said some of the dynamics which had pushed the NZ dollar trade-weighted index and Australian cross rates to post float highs this week were still in place -- particularly the carry trade.
"I'm not convinced the kiwi is about to fall sharply," he said.
"We are going to need to see some concrete evidence that the New Zealand economy is slowing sharply -- as some economists are forewarning -- before we see the kiwi dollar undermined significantly."
He said 2006 might present a different picture but for the rest of this year and early into next year, it was more likely to hold steady.
Dr Bollard's comments today that the kiwi was "exceptionally and unjustifiably high" could be interpreted as a hint the bank had intervened in the currency market.
The phrase is exactly that used in one of the criteria the bank looks at when considering intervention.
At a parliamentary committee, National finance spokesman John Key asked if Dr Bollard's choice of language was a hint and he replied: "I have been choosing my words carefully, but you also know that we wouldn't expect to talk in public about intervention possibility."
Meanwhile Moody's Investors Service said today the Aaa ratings outlook for the New Zealand dollar was stable, reflecting the flexible and market-oriented economic policies of the new government.
Moody's analyst Steven Hess said monetary policy was solidly founded on a low-inflation target and there was little concern about the current account, projected by the RB to be 9 per cent of GDP.
"There are several factors that make New Zealand's fairly large external liability position less risky than might appear on the surface.
"These include the high proportion of the liabilities denominated in New Zealand dollars, the fact that almost all of the foreign-currency liabilities are hedged, and the related-party nature of much of the external liabilities of banks in New Zealand, which are foreign-owned with one minor exception."
Yesterday, rival ratings agency Standard & Poor's (S&P) said the growing current account deficit was unsustainable, posing a risk to its rating.
S&P said it was keeping a stable outlook on the rating due to the country's low public debt levels and resilient economy, but it said New Zealand's ratings could come under pressure if the current account shortfall did not start to narrow.
The following are Reuters currency rates:
5pm today 5pm Wednesday
NZ dlr/US dlr US69.70 US71.13
NZ dlr/Aust dlr A93.60 A94.84
NZ dlr/euro 0.5960 0.6043
NZ dlr/yen 84.30 86.00
NZ dlr/stg 40.24 40.91
NZ TWI 72.57 73.75
Australian dollar US74.57c US74.97c
Euro/US dollar US1.1716 US1.1721
US dollar/yen 120.73 120.94
- NZPA
<EM>Currency:</EM> NZ dollar tumbles
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