By ELLEN READ markets writer
A quick reprieve is unlikely for anyone troubled by the high value of the New Zealand dollar against the United States and Australian currencies.
Last week, the kiwi reached fresh seven-year highs against the Australian dollar, above 93Ac, and new three-year highs against the US dollar, above 52.5USc - news which pleased importers and those planning overseas holidays but further depressed the country's exporters.
Thin holiday markets are often blamed for major currency movements in December/January, and while this may have fast-tracked the kiwi gains, the currency was on the way up anyway.
The usual suspects of New Zealand's attractive yield differential, global fund managers looking to diversify out of US dollar assets, and the political stability and strong growth story from Downunder underpinned the kiwi's gains.
"I can't see the [NZ/US] trend changing in a hurry," said John Body, director of New Zealand foreign exchange for ANZ Bank.
Body said the kiwi would run out of steam as it headed above 54.5USc - a level that would compel the Reserve Bank to reassess its monetary policy.
"[Reaching that level] will certainly stop the Reserve Bank from tightening interest rates, but it's whether it forces them to ease," he said.
As for the kiwi's run of strength against the aussie, Body predicted the Australian currency would recover, saying the kiwi would look a little stretched much above 93Ac.
While the kiwi and aussie have both made gains against the greenback over recent months, diverging growth risks and central bank policy bias have caused an increasing differentiation between the two.
Australia's growth outlook has deteriorated as the country battles its worst drought for a century and the previously buoyant housing market starts to slow.
Westpac currency strategist Jonathan Bayley said the kiwi/aussie cross was not exceptional by historical standards, trading around 9 per cent above its 10-year average of 83.7Ac.
While there was potential for the kiwi to gain another cent or two, he said, it would find a peak early this year but remain strong throughout the year.
Last year, the kiwi gained 25 per cent on the greenback and 13.5 per cent on the aussie. Bayley summed up the 12 months as "interesting".
While the local dollar spent most of 2001 between 40USc and 43USc - a 595-point range - last year saw the pair chalk up a much-larger 1059-point range between 41.5USc and 52.6USc.
Bayley said a number of changes in currency market dynamics were behind the increased movement.
The kiwi was traded less as a proxy for global growth and more on the basis of relative growth, and the widening interest rate spread had finally allowed the currency to attract more than just passing speculative demand.
This year, he said, many of last year's currency market issues would persist - the United States' struggle to fund its gaping deficit, the reluctance of Japanese authorities to allow yen appreciation, and Europe's ability to recover under tight monetary and fiscal restraint.
Bayley is forecasting the kiwi to reach a cyclical peak at 56USc in the third quarter, but cautions that this is a conservative estimate.
"The appreciation of the NZ dollar against the US should continue through 2003, as improving investor risk appetite and export demand provides a supportive backdrop for NZD assets."
NZ dollar tipped to go higher
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