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Overseas events to largely determine NZ dollar level

Friday 10th June 2011

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Reserve Bank of New Zealand (RBNZ) Governor Alan Bollard says overseas events will largely determine the level of the New Zealand dollar, which hit a post-float high around US83c against the greenback early today.

The kiwi started rising after the RBNZ released its monetary policy statement (MPS) yesterday, which was widely seen as being more hawkish than the market had expected.

The MPS indicated the first rise in the official cash rate (OCR) from its present record low 2.5% could be in December, earlier than most economists had been expecting.

Bollard said he was surprised that the markets had interpreted the RBNZ's forecast for the New Zealand economy as a little stronger than they had expected.

Something was not being interpreted quite right, Bollard said.

That was because if the RBNZ's forecast resulted in a rise in the NZ dollar, then the RBNZ would have less need to increase interest rates late this year or early next year.

"So somehow it doesn't quite add up," Bollard told Radio NZ today.

The RBNZ had not said when it would next raise interest rates. It had said the economy was doing a little better, but any rise in the OCR would depend on data through this year and next year.

The strength of the NZ dollar did reflect "exceptionally" high commodity prices, with farmers doing well, as were those exporting to Australia. It was difficult for exporters of non-primary produce in US dollars, and the tourism sector was hurting.

Anything that knocked growth, and knocked the rebalancing of the New Zealand economy was bad news, and that was the risk with the NZ dollar at its current level, Bollard said.

He would not comment on the possibility of the RBNZ intervening to try to affect the level of the NZ dollar.

Largely, lowering of the NZ dollar would depend on events overseas, mostly related to the US economy, he said.

"When that economy starts recovering, we will likely see quite a change, but we don't know that for sure."

BNZ said that, along with the MPS, factors supporting the NZ dollar overnight included a rebound in commodity and equity prices and improved risk appetite. Other so-called commodity currencies, such as those of Australia and Canada also performed well, while the greenback rose broadly on stronger than expected trade surplus data for the US.



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