The New Zealand dollar fell in local trading after Standard & Poor's cut Spain's sovereign credit rating two notches, reigniting fears about Europe's financial stability and prompting investors to quit their high-yielding assets.

The kiwi fell to 81.07 US cents at 5pm from 81.5 cents at 9am and 81.60 cents yesterday. The trade-weighted index declined to 72.22 from 72.57 yesterday. The kiwi is poised for a 1 per cent decline this week.

Rating agency Standard & Poor's cut Spain's long-term credit rating to BBB+ from A, saying the outlook is negative with a recession undermining the Mediterranean nation's ability to reduce its budget deficit. S&P also affirmed Ireland's BBB+ rating, though kept its negative outlook ahead of next month's referendum on ratifying the European Union's fiscal treaty. The kiwi fell to 61.50 euro cents from 61.67 cents yesterday.

S&P's reviews is "bringing the whole European situation back to the fore," said Tim Kelleher, head of institutional FX sales at ASB Institutional. "It should be risk off going into London (trading session), but the kiwi is still within the range."


The kiwi dollar has been trapped in a 2 US cents range for seven weeks. That's the longest stretch since a 10-week run in September and October 2006.

Kelleher said the longer it stays within those bounds, "the bigger the move" when it breaks out.

The kiwi took a hit late in the day after the Bank of Japan expanded its asset purchase fund by 10 trillion yen to 40 trillion yen. The kiwi fell to 65.70 yen from 66.20 yen yesterday.

"The asset purchase programme essentially got a six month extension," said Chris Tennent-Brown, FX economist at Commonwealth Bank of Australia in Sydney.

Offsetting the negative tone was a solid New Zealand government bond auction, which attracted $2.9 billion of bids for $900 million of available debt.

Traders bid up the kiwi through yesterday despite Reserve Bank Governor Alan Bollard keeping the official cash rate at 2.5 per cent and complaining about the strength of the currency. If its strength persists without anything changing to support that, he said he would reassess the current policy settings.

That saw traders price in the possibility of a rate cut for the next monetary policy meeting in June, and they are betting on 6 basis points of cuts over the coming 12 months, according to the Overnight Index Swap curve.

The Reserve Bank of Australia will review monetary policy next week. Economists expect it will cut the target cash rate 25 basis points to 4 per cent after tepid inflation figures earlier this week.


The kiwi dropped to 78.22 Australian cents from78.68 cents yesterday, and fell to 50.16 pence from 50.44 pence.