The dollar rocketed up almost 10 per cent against the US currency last year to rank fourth in a list of 16 major currencies tracked by Bloomberg.
Boosted by a strong local economy, world-leading interest rates and high commodity prices, the kiwi took advantage of the US dollar weakness to book strong gains. Strong, but not as impressive as the previous two years when the kiwi rose 25 per cent.
It ended 2004 worth 71.78USc, up from 66.45USc at the start of the year. The kiwi dipped below 60USc briefly in May and reached a year high above 72.50USc early last month.
As always, it was a two-way story with exporters under pressure while consumers enjoyed cheaper imported goods.
As New Year hangovers recede, attention is now turning to predictions for the next 12 months. A Reuters survey of 12 banks shows the kiwi is expected to drop back over coming months to a median forecast of 66USc at the end of this year.
As always, the fortunes of the greenback will be the driving force behind local levels. While the gaping fiscal and trade deficits in the US will remain in the spotlight, their currency impact may retreat, BNZ currency strategist Sue Trinh says.
"Even though the twin deficits will likely hamper the greenback's outlook over the medium term, it does not necessarily translate into further US dollar weakness," she said.
"There is already a strong reluctance by export-oriented countries [including New Zealand] to allow further appreciation of their currencies ... [and] the year ahead is also likely to be a year in which the US dollar begins to gain some traction from the Fed's policy of measured interest rate increases."
Overseas drivers aside, local influences suggest some moderating in the kiwi as the economy is set to slow, the widening current account deficit may deter some and local interest rates are seen on hold and then falling, in contrast to last year's world-beating rises. Westpac senior currency strategist Johnathan Bayley is expecting the downward pressure exerted on the kiwi by domestic drivers to be partially mitigated by the greenback depreciation.
"Thus while we expect the pair to test 60USc later in the year, initial progress will be slow," he said.
Against the Aussie, euro and pound, Bayley is anticipating continued depreciation throughout this year. "While neither the aussie, euro or pound are likely to be currency market outperformers, the domestic pressures facing the kiwi lead us to expect a 15 per cent to 20 per cent decline in each of these crosses [this] year," he said.
Kiwi takes advantage of sluggish greenback
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