Wild ride may take kiwi past US80c

Photo / Kenny Rodger

A US80c New Zealand dollar is looking increasingly likely as the greenback's weakness shows no sign of reversing, currency watchers say.

The kiwi hit a one-week low of US$72.50 on Monday night but then began rising again.

It was unable to hold onto gains made yesterday after better than expected retail sales data, NZPA reported this morning.

By 8am the kiwi was buying US73.37c, down from US73.68c at 5pm yesterday.

The overnight decline of the NZ currency came against the backdrop of a further broad decline by the greenback, which fell to a 14-month low against a basket of currencies.

But the strength of the domestic recovery and implications for Reserve Bank monetary policy remain a second-order issue for the kiwi-US rate.

The US dollar's slide on the Federal Reserve's crisis-driven expansion of US money supply is exacerbated by concerns about the greenback's status as the world's top reserve currency.

Central banks elsewhere, flush with record reserves, are snubbing US dollars in favour of euros and yen, adding pressure to the greenback after its biggest six-month fall in almost two decades.

Recent International Monetary Fund data suggested 63 per cent of new central bank cash reserves went into euros and yen in the three months to June with the rest going into US dollar holdings, Bloomberg reported yesterday. The US dollar's share of new reserves has averaged 63 per cent since 1999.

"Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it," said Steven Englander, a former Federal Reserve researcher who is now the chief US currency strategist at Barclays in New York.

"It looks like they are really backing away from the US dollar."

He concluded that the trend "accelerated" in the third quarter and "for the next couple of months, the forces are still in place" for diversification.

America's currency has been under siege as the Treasury sells a record amount of debt to finance a budget deficit that totalled US$1.4 trillion in the 2009 fiscal year.

"US money supply is expanding, and more importantly people have now got the sniff of a weaker US dollar ahead," Derek Rankin of Rankin Treasury Services in Auckland told the Business Herald yesterday.

Rankin said Britain, the other "epicentre" of the credit crisis, had adopted a similar response which served to devalue the pound sterling, against which the kiwi is also riding high - yesterday closing at around 46.74p.

"I think we're seeing a fundamental shift going on here and that's why I think the New Zealand dollar is going back to the highs of US82c."

He noted the kiwi was not unduly high against either the euro - at €0.4986 last night - or the aussie at A$81.20.

Meanwhile, the greenback's reserve currency status would be further tested should the current US equities rally be derailed for any reason, prompting a bout of risk aversion among investors.

"Does everyone rush into US dollars again like they did last time? We don't know, but the interesting thing is a year ago it would not have been a discussion. Now it is, and I wouldn't be surprised if a significant amount of cash went into Australia."

Royal Bank of Canada currency strategist Sue Trinh said the greenback's general weakness, with "some small evidence of diversification into aussie" which "naturally drags kiwi up just by default" would probably keep pushing the kiwi higher.

Trinh has for some time forecast the kiwi to reach the US80c mark within the next three to six months, "and we're pretty much still on track to achieve those levels".

But much of that view rests on the belief the Reserve Bank will be forced to eat its words and raise the official cash rate sooner than its existing guidance that it will begin tightening in next year's fourth quarter.

"The RBNZ is consistently underestimating the extent of activity and inflation in New Zealand ... [it's] simply not credible to keep rates at 2.5 per cent or lower until late 2010."

- ADITIONAL REPORTING: BLOOMBERG