By BRIAN FALLOW
WELLINGTON - The outlook for the New Zealand dollar remains positive despite its recent weakness, says ANZ Bank.
The kiwi was trading around 49.4USc late yesterday, dragged lower by an Australian dollar that at one point dropped below 58USc.
Having languished around 49USc for most of the year, the kiwi climbed back above 50c in late March in the wake of the unexpectedly strong gross domestic product figures for the December 1999 quarter.
However, it has struggled to maintain those gains and slipped back below 49c last week.
That reflects the fact that the Australian dollar is out of favour with international investors, who tend to bracket the two Tasman currencies together.
ANZ economist David Drage said the Australian dollar was under pressure in part because of the markets' belief that the Reserve Bank of Australia was not going to raise interest rates to the same extent as the Federal Reserve or the Reserve Bank of New Zealand.
"Also, Australian export commodity prices have failed to respond to the strengthening of world activity to the extent ours have," Mr Drage said.
The New Zealand dollar has gained ground on the the Australian in the course of the year, rising from below 78Ac in January to over 83Ac recently.
"This has reflected a recovery from what was arguably an undervalued position - driven by stronger gains in New Zealand's key commodity export prices relative to Australia's, and the potential for a more aggressive tightening from the Reserve Bank of New Zealand than the Reserve Bank of Australia," Mr Drage said.
The New Zealand dollar's fall relative to the US dollar should be seen as greenback strength as well as kiwi weakness. Over the past week, for example, the euro has slid from one new low against the US dollar to another.
The US economy grew at an annualised 5.4 per cent in the first three months of 2000.
"Notwithstanding recent equity market turbulence it is not surprising, then, that the US remains an investment destination preferred to most other countries, including New Zealand," Mr Drage said.
ANZ expects the New Zealand dollar to recover to around 55USc by the end of the year.
It bases that view partly on strong recent gains in New Zealand's commodity prices.
ANZ expects the Reserve Bank to raise interest rates another full percentage point by the end of the year.
That would underpin the New Zealand dollar, Mr Drage said, but the effect would be moderated by the fact that most other central banks (with Japan's the only notable exception) were also raising their rates.
"Consequently, rising New Zealand interest rates are unlikely to have as profound an influence on the New Zealand dollar as was the case in the 1994-1996 period when interest rate differentials moved strongly in New Zealand's favour."
Two influences which had been weighing the dollar down - the deep current account deficit and uncertainty about the new Government - would tend to wane.
Sluggish Australian dollar drags kiwi down
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