Bollard talks down dollar, but fails to win credit

Reserve Bank Governor Alan Bollard Photo / Mark Mitchell

Reserve Bank (RB) Governor Alan Bollard spoke and the New Zealand dollar fell, but not all the credit is being given to the central bank boss.

Releasing the RB's six-monthly Financial Stability Report today, Dr Bollard warned about risks posed by the high level of the New Zealand dollar.

He attributed the strength of the currency to developments involving the major economies, but also questioned how recent data in this country, including employment and retail trade, had been viewed by investors.

In the past couple of weeks financial markets had "taken it into their head" to interpret some New Zealand data more strongly than the RB might have done, Dr Bollard said.

"If there's some misinterpretation of New Zealand data, as we fell there might have been over the past couple of weeks, then we'd look for the market to correct that."

TD Securities senior strategist Annette Beacher said Dr Bollard had shown great timing in talking down the NZ dollar after ructions in foreign exchange markets overnight.

But for Dr Bollard to be given credit for a fall today from around US78.60c to US77.60c was completely misguided, as the euro and Australian dollar similarly nosedived, Beacher said.

She pointed to overnight speculation of an imminent Chinese interest rate hike to explain why currencies moved so much this morning.

In a volatile session, the NZ dollar rose from near US78c about 8pm yesterday to US79.15c at 3.30am today.

It then fell away to around US78.30c, where it hovered for about 1-1/2 hours before falling away after Dr Bollard's comments.

It dropped to around US77.70c for a couple of hours.

Today's stability report also noted that non-performing loans in the banking system appeared to be approaching a plateau, after rising steadily from the middle of 2007, and bank profitability was also improving.

But, a further weakening in the "tepid" economic recovery had the potential to generate further loan losses in the banking system, the report said.

"House sales have stalled for the past six months, and there are signs of prices falling again. Were this to be accompanied by renewed weakness in the labour market, some mortgage borrowers would find themselves in a position of financial stress."

The banking system also remained heavily exposed to developments in the agricultural sector, where land values had been falling and farm sales volumes were very low.

In the non-bank deposit-taking (NBDT) sector three finance companies had failed in the past six months, the most notable being South Canterbury Finance, which went into receivership owing $1.6 billion.

The wider fallout from the failures had been limited, with the companies involved covered by the Government's retail deposit guarantee scheme.

- NZPA