Kiwi dollar falls on rumours of Reserve Bank intervention

The New Zealand dollar has stumbled, after surging 3.1 per cent in the past two days, as the Federal Reserve announced it will begin unwinding its extraordinary stimulus measures early next year and rumours surfaced that the Reserve Bank intervened in the currency market.

The Fed will slow its buying of mortgage-related securities, pushing out the US$1.45 trillion programme until the end of March, saying "economic activity has picked up following its severe downturn."

The Federal Open Market Committee kept its target band for interest rates at between zero and 0.25 per cent, and stocks on Wall Street eased on the prospect of the central bank moving away from printing money.

Rumours of Reserve Bank intervention also pushed the kiwi lower, after the currency surged to a 13-month high on figures showing the end of recession ans a shrinking current account gap, and Fonterra beefed up its forecast payment to farmers.

"The kiwi came down largely on the back of the Fed statement, but there were rumours of a Reserve Bank intervention" that helped drag it lower, said Philip Borkin, economist at ANZ National Bank. "The kiwi's definitely one that's loved at the moment with the fact GDP expanded, the current account numbers and Fonterra all better-than-expected."

The kiwi dollar sank to 71.84 US cents from 72.51 cents yesterday, and declined to 65.46 on the trade-weighted index, or TWI, a measure of the currency against five major trading partners, from 65.83. It slipped to 65.62 yen from 66.01 yen yesterday, and dropped to 48.81 euro cents from 49.07 cents yesterday. The kiwi declined to 82.65 Australian cents from 82.89 cents yesterday.

Borkin said the currency may trade between 71.90 US cents and 72.90 cents today, as it continues to follow global equity markets. The currency was still in an upward trend, and will probably find support around its current levels, he said.

Mike Hannah, communications manager at the Reserve Bank, said it is the bank's policy never to comment on whether it has intervened in the currency.

The bank may intervene in foreign exchange markets when the exchange rate is exceptionally high or low, is unjustified by economic fundamentals, won't impact on price stability, and will have a reasonable chance of success, according to its published guidelines.

Still, even the prospect of intervention is enough to get currency traders buying and selling, said Borkin. "It's just a rumour, but the markets do move on the back of those," he said. "I don't think the New Zealand dollar on the TWI is up to those levels."

Leaders of the Group of 20 nations meet in Pittsburgh, USA over the next two days, and markets will be looking for any specific information around withdrawing massive stimulus measures.

International Monetary Fund managing director Dominique Strauss-Kahn said the leaders need to restore global economic growth, and that the recovery will continue to be "sluggish."

-BUSINESSWIRE