New Zealand Dollar Declines on Outlook for Interest-Rate Cuts

By Tracy Withers

Aug. 18 (Bloomberg) -- The New Zealand dollar fell on speculation the central bank will cut interest rates next month as the economy slows, reducing the currency's high-yield advantage.

A report late last week showed retail spending slumped at a record pace in the second quarter, adding to signs that Reserve Bank of New Zealand Governor Alan Bollard will cut the official cash rate by a quarter-percentage point to 7.75 percent on Sept. 11. Traders expect the benchmark rate will fall 1.5 percentage points within the next year, according to a Credit Suisse Group index based on interest-rate swaps.

``We still think the Reserve Bank is on track to cut interest rates in September, which combined with the New Zealand economy teetering on the brink of recession should see the New Zealand dollar trend lower,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington.

New Zealand's currency bought 70.42 U.S. cents at 11:04 a.m. in Wellington from 70.60 cents in late New York trading Aug. 15. The currency bought 77.69 yen from 78.02 yen.

The currency is the worst-performer among the 16 most- traded against the U.S. dollar the past six months after Bollard last month cut the benchmark rate for the first time in five years.

Weighing on the New Zealand currency, the U.S. dollar climbed to its strongest in six months against the euro and advanced to a seven-month high versus the yen last week. The U.S. dollar is rising as European and Japanese economies slow and crude oil prices drop.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net