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NZ dollar holds gains as Wheeler cites house-price inflation, US impasse continues

Thursday 3rd October 2013

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The New Zealand dollar held its gains after jumping at the start of the day when Reserve Bank Governor Graeme Wheeler said he would raise interest rates more aggressively if mortgage lending limits don't curb house-price inflation.

The kiwi traded at 83.07 US cents at 5pm in Wellington, having jumped about half a cent following Wheeler's statement, from 82.21 cents yesterday. The trade-weighted index rose to 77.04 from 76.44 yesterday.

Wheeler, who has faced criticism from banks, opposition MPs and builders over limits imposed this month on high loan-to-value home mortgages, released a statement today defending the policy and saying he would step up hikes to the official cash rate if it proves unsuccessful. The kiwi had already climbed this week in the wake of the US budget impasse which has shut some government services.

"The key is going to be whether Europe takes the kiwi further," said Alex Hill, head of dealing at HiFX. "Most of it is still a US dollar story. There's been disappointment that there's been no reduction in stimulus" by the Federal Reserve "and now we have got the shutdown."

The concern now is the damage a prolonged shutdown could cause the US economy, which in turn could delay any reduction to the Federal Reserve's US$85 billion-a-month bond buying programme, he said. "The short-term strength of the US dollar is dependent on when the US stops printing money."

Wheeler said the New Zealand central bank expects to increase the 2.5 percent official cash rate by 2 percent from 2014 to the beginning of 2016 but would make larger increases should the LVR limits fail to slow house price inflation.

From Oct. 1, the Reserve Bank has required banks to restrict mortgage lending to borrowers with less than a 20 percent deposit to no more than 10 percent of their total lending.

The New Zealand dollar traded at 88.42 Australian cents from 88.56 cents at 8am in Wellington and up from 87.70 cents yesterday. The kiwi rose to 81.09 yen from 80.35 yesterday, rose to 61.05 euro cents from 60.80 cents and increased to 51.15 British pence from 50.82 pence.

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