New Zealand Dollar Heads For Weekly Drop on Rate Expectations

By Candice Zachariahs

Aug. 1 (Bloomberg) -- The New Zealand dollar headed for a second consecutive weekly decline as traders raised bets that the central bank will keep lowering borrowing costs to boost a slowing economy.

New Zealand's currency traded near a 10-month low as investors speculated the currency will extend July's 4 percent decline as the Reserve Bank of New Zealand continues to reduce interest rates. The kiwi, as it's called, fell 1 percent on July 30 after central bank Governor Alan Bollard emphasized an ``easing bias' in monetary policy.

``A number of economic indicators are declining, there are stresses in the financial sector and the RBNZ has clearly turned dovish,'' said Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc. in Toronto, a unit of Canada's biggest bank. ``We are most concerned about the New Zealand dollar,'' among the major currencies.

New Zealand's dollar rose to 73.42 U.S. cents at 8:49 a.m. in Wellington from 73.33 cents late in Asia yesterday and from 74.54 a week ago. Earlier it touched 73.17 cents, near its Sept. 26 low of 73.08 cents. The currency bought 79.12 yen from 79.35 yesterday and 79.88 yen a week ago in New York. The kiwi dropped 1.4 percent against the yen last month.

A benchmark rate of 8 percent, compared with 0.5 percent in Japan and 2 percent in the U.S., has made the New Zealand currency a favorite with investors looking to invest in higher- yielding assets.

Bollard lowered the benchmark rate by a quarter-percentage point from 8.25 percent on July 24, the first reduction in five years. Two days ago, he said the bank had ``adopted an easing bias in our monetary policy'' as a weak economy is ``sufficient'' to slow inflation.

ANZ National Bank Ltd. reported yesterday that business confidence in New Zealand fell for the first time in four months, saying that the economy was ''firmly in contraction mode.'' The nation's economy contracted 0.3 percent in the first quarter. Eight of 13 economists surveyed by Bloomberg News expect it also shrank in the three months ended June 30, putting the nation in its first recession since 1998.

``The survey is very deeply in negative territory and more rate cuts will be required to lift business confidence,'' said Joshua Williamson, a senior strategist at TD Securities Ltd. in Sydney.

Traders are betting the RBNZ will cut its benchmark interest rate by 149 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.

To contact the reporter on this story: Candice Zachariahs in New York at czachariahs1@bloomberg.net