N.Z. Dollar Trades Near 10-Month Low on Interest-Rate Outlook

By Ron Harui and Candice Zachariahs

July 31 (Bloomberg) -- New Zealand's dollar traded near a 10-month low on speculation the central bank will cut interest rates after Reserve Bank of New Zealand Governor Alan Bollard emphasized an ``easing bias'' in monetary policy yesterday.

The currency, known as the kiwi, headed for a second monthly decline on prospects that RBNZ's rate reductions will diminish the appeal of the nation's higher-yielding assets. The kiwi has fallen 3.1 percent this month, the worst performance among the 16 most-active currencies, as signs of slowing growth prompted traders to add to bets for lower borrowing costs.

``The New Zealand economy looks like it has started to fall off a cliff,'' Ned Rumpeltin, a London-based strategist at Morgan Stanley, said in a research note yesterday. As the kiwi rate advantage slips, ``we expect broad-based New Zealand dollar declines as the last pillar of support for the currency recedes.''

New Zealand's dollar traded at 73.44 U.S. cents at 11:24 a.m. in Wellington, from 73.31 cents late in Asia yesterday. It earlier touched 73.16 cents, the weakest since Sept. 26. The currency bought 79.40 yen, from 79.03 yen.

The kiwi may fall for a fourth day after Bollard said in a speech in Auckland yesterday that the housing downturn, high energy prices and the global credit crunch were ``sufficient'' to lower inflation. The central bank cut its official cash rate a quarter-percentage point to 8 percent on July 24.

A benchmark interest rate of 8 percent in New Zealand, compared with 2 percent in the U.S. and 0.5 percent in Japan, makes the nation a popular destination for international investors seeking higher returns.

Business Confidence Report

The kiwi also may weaken before the ANZ National Bank Ltd. releases a report on New Zealand business confidence for July at 3 p.m. in Wellington today. The report showed last month that a net 38.7 percent of companies expect the economy will get worse over the next 12 months, compared with 49.7 percent in May.

Traders are betting the RBNZ will cut its benchmark rate by 148 basis points in the next 12 months, up from 143 basis points yesterday, according to a Credit Suisse Group index based on interest-rate swaps. The RBNZ typically adjusts rates by 25 basis points, or 0.25 percentage points.

New Zealand's government bonds were little changed. The yield on the benchmark 10-year note was unchanged from yesterday at 6.16 percent and the yield on the three-year security held at 6.20 percent. Yields move inversely to prices.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg; Candice Zachariahs in New York at czachariahs1@bloomberg.net