Dropping dollar pushes currency below fair value

Tuesday 12th August 2008

The New Zealand dollar extended its decline in the past month to about 10% and is now below fair value, according to Bank of New Zealand.

The currency fell as low as 69.76 US cents today from 70.39 cents yesterday. The kiwi has declined as evidence of a weakening domestic economy and waning growth worldwide stoked speculation the central bank will cut interest rates through this year.

The kiwi's "fair value" is 70.40 US cents to 72.40 cents based on BNZ's short-term valuation model, said strategist Danica Hampton. That suggests it will take further gains in the US dollar or more weak domestic data to drive the currency lower, she said.

The US dollar gained to the highest in more than five months against the euro, helped by declines in the price of crude oil and other commodities. It has reached $1.4881 in the past 24 hours, the highest since February.

More evidence of the New Zealand economy's pace will come on Friday with the release of June retail sales, with economists predicting a 0.1% gain after a 1.2% decline in the previous month.

Still, the figures may include a bounce back in vehicle spending after a big drop the previous month, said Craig Ebert, economist at BNZ. Ex-autos retail trade may have declined 0.8% in June, confirming the household sector "remains down in the dumps," Ebert said in a report yesterday.

Figures yesterday showed housing demand remains weak. Quotable Value said average property prices fell 2.2% in July, highlighting the ailing economy and higher household costs.

Most economists predict Reserve Bank Governor Alan Bollard will reduce the official cash rate at each opportunity this year from 8% currently. That's likely to sap demand for the kiwi, once a favorite for the carry trade, where investors borrowed funds cheaply in yen to buy high-yielding assets.

Bollard next reviews interest rates on September 11.

By Jonathan Underhill

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