By BRIAN FALLOW
WELLINGTON - The New Zealand dollar yesterday regained some of the ground it had lost in a sharp sell-off over the weekend.
Already battered on Friday by reaction to worse-than-expected trade figures, the kiwi was caught in the wake of a worldwide surge of buying of the United States dollar.
Having dropped more than half a cent to below 50USc on Friday, after news the trade deficit for 1999 had ballooned out to $3.6 billion, it continued to drop, hitting 48.5USc before edging back up to start yesterday around 49.2c.
It closed around 49.5c.
The currency's weakness is adding to expectations that when the Reserve Bank next reviews interest rates in mid-March, it will raise them by 50 basis points.
"Interest rates will have to do most of the work in the early stages of this tightening cycle," said Bank of New Zealand treasury economist Geoff Mason.
Concerns about trade and the balance of payments have been weighing on the New Zealand dollar for some time, offset by expectations of higher interest rates.
The surprising low inflation figure for December undermined some of that underpinning.
It suggested to some market participants that interest rates might not rise as much as they had expected, WestpacTrust chief economist Bevan Graham said, "though that is not our view."
The trade figures did the kiwi damage on Friday, then foreign exchange markets worldwide reacted to news that economic growth in the United States was running at an annualised rate of 5.8 per cent in the last quarter of 1999 and that US employment costs were above expectations.
"Even after a 75 basis point tightening by the Federal Reserve last year the US economy hasn't slowed," Mr Mason said.
The Fed's policy-making committee is due to meet on Thursday and some commentators now expect it to raise rates by a further 50 points.
ANZ treasury economist David Drage said that the market response to the prospect of higher US interest rates varied: "Sometimes it is good for the US dollar on an interest rate differential argument, sometimes it is bad for the US dollar because of a sell-off in asset markets." In this case, despite a sharp drop in the Dow Jones average, the former effect had predominated.
Rumours that a hedge fund was in trouble added a "flight to safety" effect.
The US dollar rose to record highs against the euro and wiped out nearly four months' slippage against the Japanese yen.
The Australian dollar also fell sharply against the greenback, on interest rate differential grounds. Benign inflation figures have tilted market expectations towards a 25-point rather than 50-point tightening by the Reserve Bank of Australia today.
"The aussie will gain from the rate rise and the kiwi will probably gain on the back of that," Mr Mason said.
Flight to US puts pressure on kiwi
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