Dollar falls on OCR cut

The New Zealand dollar has fallen 15% against the greenback so far this year, reflecting weaker economic growth, falling dairy prices, lower interest rates and a pick up in the US. Photo / NZME.

The New Zealand dollar dropped by about US1c after the Reserve Bank cut its official cash rate by 25 basis points to 2.75 per cent and heavily hinted that more cuts would follow.

The Kiwi, which traded at US64c just before the announcement, dropped first to US63.30c and then to US63.0c on the back of the bank's comment that further depreciation in the exchange rate was necessary.

"A reduction in the official cash rate is warranted by the softening in the economy and the need to keep future average CPI inflation near the 2 percent target midpoint," the bank said. "At this stage, some further easing in the official cash rate seems likely," it said.

ANZ senior foreign exchange strategist Sam Tuck said he expected the Kiwi to remain under downward pressure after the bank's "dovish" announcement.

Global economic growth remained moderate, but the outlook has been revised down due mainly to weaker activity in the developing economies, the bank said in a statement.

Domestically, the economy was adjusting to the sharp decline in export prices, and the consequent fall in the exchange rate, it said.

Several factors continued to support growth, including robust tourism, strong net immigration, the large pipeline of construction activity in Auckland and other regions, and the lower interest rates and the depreciation of the New Zealand dollar.

"While the lower exchange rate supports the export and import-competing sectors, further depreciation is appropriate, given the sharpness of the decline in New Zealand's export commodity prices," Reserve Bank Governor Graeme Wheeler said in a statement.

Today's rate cut was widely anticipated in the financial markets and follows two rate cuts of 25 basis points each in June and July.