NZ Dollar drops to a week low on Europe concern

The kiwi dollar has hit a new low for the week.

The New Zealand dollar dropped to a week-low as speculation European interest rates may go negative and the prospect of the US central bank winding back its stimulus programme remaining in sight fuelled demand for the greenback.

The kiwi fell as low as 82.35 US cents, trading at 82.55 cents at 5pm in Wellington from 82.75 cents at 8am and down from 83.45 cents yesterday. The trade-weighted index dropped to 77.33 from 77.71 yesterday.

The Dollar Index, a measure of the greenback against a basket of currencies, climbed 0.7 per cent to 82.13 amid speculation the European Central Bank may try to revive the regional economy by lowering the deposit rate below zero. The world's reserve currency got more support from minutes to the last Federal Open Market Committee meeting, which showed US central bank policymakers expect economic growth to "warrant trimming the pace of purchases in coming months."

"It was all one-way traffic for the currency," said Imre Speizer, market strategist at Westpac Banking Corp in Auckland. "It's all going to be about Fed-watching and taper-watching for quite a while."

A weak Chinese manufacturing indicator also weighed on the Antipodean currencies, with a preliminary reading for activity falling short of expectations.

Investors will be watching Reserve Bank assistant governor John McDermott's speech on influences on the exchange rate tomorrow in Wellington. New Zealand's central bank has been balancing a heating property market, which threatens to fuel increases in consumer spending, against the strong currency cooling imported prices.

The kiwi traded at 88.64 Australian cents at 5pm in Wellington from 88.59 cents yesterday after the International Monetary Fund said Australia's currency looked overvalued by about 10 per cent. The Reserve Bank of Australia this month complained about the strength of its currency when keeping its key rate unchanged at 2.5 per cent.

The local currency fell to 82.85 yen from 83.44 yen yesterday, and was little changed at 61.48 euro cents from 61.53 cents. It declined to 51.29 British pence from 51.77 pence.