KEY POINTS:
The first negative quarterly inflation in nearly six years saw the New Zealand dollar sold off sharply today, although it staged a late partial recovery.
The 0.2 fall in the Consumer Price Index in the December quarter diminished the chance of Reserve Bank governor Alan Bollard hiking rates next week, economists and analysts said.
"Given that data, it would be hard to see him moving now," ANZ Investment Bank chief dealer Murray Hindley said.
The kiwi had been trading up around US69.58c shortly before Statistics NZ released the information. It fell as low as US68.87c but recovered to end the session on US69.17c, against US69.55c at 5pm yesterday.
It lost ground on all the major cross rates, ending at A88.34c against the Australian dollar compared to A88.83c yesterday.
The trade weighted index fell to 68.84 from 69.15 at the same time yesterday.
Mr Hindley said the kiwi was likely to come under sustained pressure if the Reserve Bank abandoned its tightening bias at its rate review next week.
From a technical viewpoint, once US68.80c was broken then the currency was likely to take a steep step lower.
In the major currencies, the yen slid to a 13-month low against the US dollar as media reports said the Bank of Japan was likely to hold interest rates steady this week, dousing widespread expectations for an increase.
Many investors had thought a BOJ rate rise to 0.5 per cent this week was a done deal in the run-up to the central bank's two-day policy meeting ending on Thursday before the array of reports from Kyodo news agency, the Nikkei newspaper and others.
Market players have used the low-yielding Japanese currency as a source of funds to purchase higher-yielding currencies such as the kiwi in the carry trade, helping drive sterling to eight-year highs against the yen.
"This has hurt the BOJ's credibility," said Toru Umemoto, chief FX strategist at Barclays Capital in Tokyo, adding that the BOJ's decision could send the dollar above 125 yen in the next few weeks.
"The carry trade has reached risky levels already, and the BOJ skipping a rate rise could lead to a further accumulation of carry trades. I'm worried there could be a crisis correction later."
The euro was little changed against the US dollar at US$1.2925.
Reuters currency rates:
5pm today 5pm yesterday
NZ dlr/US dlr US69.17c US69.55c
NZ dlr/Aust dlr A88.34c A88.83c
NZ dlr/euro 0.5352 0.5376
NZ dlr/yen 83.62 83.78
NZ dlr/stg 35.28p 35.40p
NZ TWI 68.84 69.15
Australian dollar US78.28c US78.29c
Euro/US dollar 1.2923 1.2936
US dollar/yen 120.83 120.48
- NZPA