BY ELLEN READ
The forecast rise of the New Zealand dollar is under threat, and in a continuation of last year's theme the United States currency is the culprit.
The kiwi has lost ground amid signs of renewed confidence in the US economy - falling to 42.83USc on Friday - and dealers warn further falls are possible.
Bank of New Zealand currency strategist Stu Ritson said much of the pre-Christmas strength in the kiwi was based on the weakening US dollar - driven in turn by the slowdown in the US economy.
"Now we've just seen a bit of stronger data out of the States and we've also seen upbeat comments from [US Federal Reserve] chairman [Alan] Greenspan and that's just turned sentiment back in the US dollar's favour," he said.
The recent pullback is not unique to the kiwi, and had been seen across other currencies, he said.
Mr Ritson said there had been little in the way of portfolio investment in New Zealand, and only a couple of mergers and acquisitions.
This meant most of the appreciation seen towards the end of last year was driven by short-term speculative funds and momentum accounts.
This type of investing showed there was little outright support for the kiwi, increasing the threat of a move lower, he said.
"We could see it go back to the mid-41USc before we see any turnaround or regain in strength.
"Essentially to take a view on the kiwi is to take a view on the US economy."
There were diverging views on what is happening in the US, so the medium-term path for the kiwi was less clear than it had been for some time, Mr Ritson said.
Head of foreign exchange at Citibank Dean Sheridan agreed the kiwi could head lower in the face of renewed US dollar strength.
"Really we're just being battered around by movements in the US market," he said.
Mr Sheridan said in recent times there had been a lot of interest from people trying to get out of US assets and into other currencies due to the belief the US economy was faltering.
"But now with these rate cuts [in the US] and Greenspan not saying that there's going to be too much damage done to the US economy, we've just really seen the bullish tone taken out of those currencies for the time being," Mr Sheridan said.
The kiwi could head up to 44-45USc but was unlikely to push higher over the next three to four months and was more likely to be pushed lower by a weakening Australian currency in the short term.
Interest rate differentials could support the kiwi later in the year as US rates continued to fall and New Zealand rates did not go as low, Mr Sheridan said.
ASB senior economist Anthony Byett was more optimistic, believing it would rise to hit 50USc by the end of the year.
"That's still a reasonably competitive exchange rate for exporters so in terms of the economic impact, I don't think it will have a big dampening impact on the economy," he said.
At the end of last year, the economic story was one of export-led growth and that was likely to remain the case over the coming year, Mr Byett said.
That was not great news for the household sector, which could still struggle although the export-driven growth was flowing through to some extent.
<i>Currency:</i> Kiwi falters as US gathers strength
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