By ELLEN READ and AGENCIES
The kiwi reached new highs yesterday, closing in on 70USc as the market adjusted its reaction to weekend G7 comments.
"We're pushing up against the recent highs today and as we speak we're taking out 69.5USc again. It's not going to stop before 70USc," said ANZ director of foreign exchange John Body.
Also helping the kiwi were Reserve Bank of Australia comments that the aussie is strong because global investors are seeing the emergence of sustained economic growth and want to be long in commodity currencies, of which New Zealand is one.
At 5pm yesterday the kiwi was at 69.57USc, a level not seen since mid 1997.
The US dollar hit a two-week low against the euro yesterday, losing early gains as the market decided the G7's warning against "excess volatility" in rates did not herald action to support the greenback.
The greenback jumped nearly 1 per cent against the euro at the start of trade as dealers initially took the G7 statement as a sign that Washington had heeded European and Japanese concerns about the US currency's sharp fall.
But it quickly reversed course on the growing perception that the G7 warning was little more than lip service and that any co-ordinated action to stop the greenback's two-year decline was unlikely.
"[The markets] reacted to the G7 meeting which was seen as a quasi European Central Bank attempt to cap the euro, but it's been very short lived and the euro started to claw back some of its gains as people started to feel that the G7 statement was a little toothless," said Body.
Asked why the markets react at all when the central banks are not expected to intervene in the currency, he said it comes down to foreign exchange market history.
"There have been one or two events, and I guess the Plaza Accord is the most significant recent one, where post a meeting of a market governing body there's been rapid re-alliance in currencies," Body said.
Under the 1985 Plaza Accord, industrialised nations banded together to weaken the US dollar.
The greenback had reached a high relative to many major currencies, and the US was experiencing a large trade deficit.
The moves resulted in a 30 per cent decline in the dollar over the next two years.
"So there's always the fear that this may be the start of something bigger ... and in the meantime risk has to be managed," Body said.
The danger for the Australasian currencies is that if there is a more concerted attempt by G7 leaders to stop the rise in the euro, and that doesn't change the underlying perception that the US dollar will be weak, the local currencies could become more of a target for expressing a short US dollar view, Body said.
"If euro gets too hard to be short of and Asian currencies remain on a 'dirty float' regime, that could spike the aussie and kiwi higher," he said.
ANZ is still forecasting the kiwi will reach 72USc, but the level could be hit sooner than its original mid-year forecast.
Westpac currency strategist Johnathan Bayley thinks the kiwi will hold up against European currencies in coming months as the G7 statement will encourage market participants to pursue relative growth trades - which favour New Zealand.
However, Westpac's view is that once above 70USc the kiwi will not be far from its ultimate cycle high.
The announcement of Australia's free-trade agreement with the US is unlikely to affect the kiwi/aussie cross as it won't lead to any immediate currency flows.
"When they get announced there's a quick change in sentiment but then the reality of day-to-day importer/exporter and investor flows, nothing happens immediately," said Body.
"It's an underlying reason to think that kiwi/aussie above 90Ac is overvalued but it's not an imminent driver of direction for the next one to two months."
The kiwi was at 89.84Ac at 5pm yesterday.
Kiwi nudges 70USc after G7 comments
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