New Zealand Dollar Weakens to 11-month Low on Interest Outlook

By Candice Zachariahs

Aug. 12 (Bloomberg) -- The New Zealand dollar plunged to an 11-month low as the U.S. currency strengthened and investors bet that the Reserve Bank of New Zealand will lower rates to boost a slowing economy.

The currency, called the kiwi, also fell against the Japanese yen on expectations that the central bank will cut interest rates further over the next 12 months, making the nation's assets less attractive to international investors seeking higher returns. The Reserve Bank of New Zealand lowered interest rates to 8 percent from 8.25 percent on July 24.

``It's basically a move into U.S. dollars,'' said Tony Allen, head of currency trading in Wellington at ANZ National Bank Ltd. ``It seems that everyone is happy to be piling back in to U.S. assets.''

New Zealand's dollar dropped 0.7 percent to 69.89 U.S. cents at 9:18 a.m. in Wellington from 70.39 cents late in Asian trading yesterday. It earlier reached 69.76 cents, the lowest since Sept. 12. It bought 76.92 yen, from 77.27 yesterday.

The kiwi fell against 14 of the 16 most-traded currencies as sliding commodity prices helped the U.S. dollar rise to a 5 1/2-month high against the euro amid speculation the U.S. slowdown is spreading to the global economy.

Reserve Bank Governor Alan Bollard had kept New Zealand's official cash rate at a record 8.25 percent since July 2007 before last month's cut.

``There's been a shift from rewarding central banks that were more inflation-focused to central banks that are more mindful of protecting the down-side risks to growth,'' Samarjit Shankar, director of global strategy for the foreign-exchange group in Boston at Bank of New York Mellon, said yesterday. The company is the world's largest custodian bank, with about $23 trillion in assets under custody.

Pressure on Kiwi

New Zealand's benchmark interest rate compares with 2 percent in the U.S. and 0.5 percent in Japan, making the nation's currency a favorite target for investors seeking higher returns. Traders expect the Reserve Bank to lower the benchmark rate 1.47 percentage points over the next 12 months, according to a Credit Suisse Group index based on overnight swaps trading yesterday.

Further cuts will put ``downward pressure'' on the kiwi against the Japanese yen, Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington, wrote yesterday. The bank forecast that the New Zealand dollar will buy 76 yen by year-end and almost 73 by the middle of 2009.

``However, the risks are skewed in favor of the currency falling more quickly and further than currently anticipated,'' Hampton wrote.

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