KEY POINTS:
New Zealand dollar investors today showed few signs of being worried by Finance Minister Michael Cullen's threat to suspend current monetary policy.
The kiwi hit a new 22-year post-float high against the greenback early today. It peaked around 4am at US79.45c but eased back to US79.12c by the close, slightly down on yesterday's US79.32c finish.
Commentators have been perplexed about the motives for Dr Cullen's repeated references this week to the special powers he has over the central bank. But today he clarified things by saying he had wanted to warn foreign investors the kiwi was not a one-way bet.
He told journalists and Parliament he had been delibately trying to raise awareness of his never-used power to suspend his agreement with the Reserve Bank to target inflation.
Such a move would be unprecedented in New Zealand since the Reserve Bank was set up 20 years ago as an independent body to combat inflation.
"I am just trying to point out to people there are risks they might not be aware of," Dr Cullen told journalists
Asked if he was just playing a game to try and scare the markets, Dr Cullen said his power was real.
"No government should tell the financial market speculators when it might use such a provision."
However, the likelihood of another rate rise this month and the persistent weakness of the US dollar have had more sway on the kiwi.
The US dollar softened further across the board overnight after Federal Reserve chairman Ben Bernanke said US housing woes could get worse before they get better.
The kiwi eased against the aussie to A90.16c from A90.30c at 5pm yesterday and the trade weighted index eased to 75.65 after hitting a record 76.08 yesterday.
Bank of New Zealand currency strategist Danica Hampton said the NZ dollar had been underpinned during the past few days by heightened speculation about further rate hikes by the Reserve Bank.
But market participants could not ignore the increasing political backchat surrounding monetary policy and the NZ dollar, she said.
The ANZ Bank said Dr Cullen's comments yesterday were "merely currency jawboning", but they did reinforce the point that while the Reserve Bank had independence, it was merely operational independence and its continuation resided with the discretion of the Government.
Meanwhile, the US dollar stayed near a record low against the euro and a 26-year trough versus sterling.
In a testimony before Congress, Dr Bernanke repeated that inflation was the Fed's top concern but said weakness in the housing sector would likely crimp growth in the coming quarters.
The Fed has also lowered its forecasts for US economic growth for 2007 and 2008.
Reuters currency rates:
4.30pm today 5pm yesterday
NZ dlr/US dlr US79.12c US79.32c
NZ dlr/Aust dlr A90.16c A90.30c
NZ dlr/euro 0.5737 0.5734
NZ dlr/yen 96.52 96.58
NZ dlr/stg 38.54p 38.59
NZ TWI 75.65 75.75
Australian dollar US87.76c US87.82c
Euro/US dollar 1.3795 1.3820
US dollar/yen 121.95 121.79
- NZPA