NZ dollar decline on tepid inflation outlook

File Photo / NZ Herald

The New Zealand dollar is poised for a 1 per cent weekly decline as a tepid inflation outlook looks likely to keep local interest rates low for an extended period and Europe's sovereign debt woes threaten to re-emerge.

The kiwi fell to 81.30 US cents at 5pm from 82.17 cents last week, and was down from 81.38 cents at 8am and 81.64 cents yesterday. The trade weighted index was down 1 per cent on the week at 72.60 and was down from 72.88 yesterday.

Traders have been reassessing the timeline for a rate hike by the Reserve Bank, and are pricing in just 8 basis points of increases over the coming 12 months, according to the Overnight Index Swap curve.

That comes after yesterday's consumers price index showed first-quarter inflation at 0.5 per cent, which reinforced views the central bank may keep the official cash rate at 2.5 per cent for longer than previously expected. Governor Alan Bollard will review the OCR next week and is expected to keep rates on hold.

"CPI was pretty soft and expectations about the Reserve Bank of New Zealand's next likely rate move has been pushed out a little now," said Peter Dragicevich, currency strategist at Commonwealth Bank of Australia in Sydney. "That's helped dampen the kiwi."

The re-emergence of Europe's sovereign debt woes kept risk-sensitive assets such as the kiwi and Australian dollars on the back-foot this week, and the higher yields offered in Spain's government did little to allay fears the Mediterranean nation may have to tap a bail-out.

Finance ministers of the Group of 20 nations have been at the semi-annual meeting with the World Bank and International Monetary Fund in Washington DC, and have been discussing ways to get on top of Europe's debt woes. The IMF has secured US$320 billion of pledges for a new fund and is looking for US$400 billion.

"That's a good starting point to help stem the crisis, but will it be enough?" Dragicevich said.

The kiwi fell to 61.84 euro cents from 62.25 cents yesterday, and declined to 50.61 pence from 50.94 pence. It was little changed at 78.72 Australian cents from 78.80 cents yesterday, and fell to 66.25 yen from 66.42 yen.