Dairy threat weighs heavily on NZ dollar

The 1080 scare remained a compelling reason to sell. Photo / NZME.

Fallout from this week's baby formula contamination threat weighed heavily on the New Zealand dollar yesterday, with news of curtailed orders from China driving the currency lower still.

Reports on Bloomberg and Reuters of formula orders being reduced or put on hold helped push the kiwi down through key support at US72.50c in afternoon trading. By late in the day, the kiwi was at US72.27c - down by more than US1c since just before Tuesday's announcement by the Government that a threat to contaminate infant formula with 1080 poison had been made.

"We are seeing some suggestions that some orders are being placed on hold because of that threat, so the New Zealand dollar does remain under pressure because of that," said ANZ senior foreign exchange strategist Sam Tuck. "We don't think the long-term effect on the NZ dollar is going to be significant, but we do not think that there can be anything positive for the New Zealand economy to come of this, so the risks remain on the downside."

The primary influence over the kiwi, and its steadily weakening Australian counterpart, was a resurgent US dollar as expectations that US interest rate markets would soon return to normal started to take hold, but the 1080 scare remained a compelling reason to sell, dealers said.

The scare meant the kiwi had lost its resistance to US dollar strength, putting it in the same club as several other weakening currencies.

In the meantime, expectations were growing that Federal Reserve policymakers should not wait too long to raise interest rates.

Last week San Francisco Fed chief John Williams said: "I think that by mid-year it will be the time to have a serious discussion about starting to raise rates."

Closer to home, the Reserve Bank is set to release its monetary policy statement review today, and expectations were that the bank would keep the Official Cash Rate on hold at 3.5 per cent.

"We do not believe the Reserve Bank will wish to fuel rate cut expectations, however we do think it will significantly flatten its published 90-day bank bill track," the BNZ said in a commentary.

It said that this in itself, along with the usual talk of the currency being too high, could be enough to encourage current negative momentum in the NZ dollar.