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YEAR IN REVIEW: Kiwi heads for 2014 decline in year it neared record high

Tuesday 30th December 2014

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The New Zealand dollar is heading for a 5 percent decline against the greenback in 2014, in a year which saw the currency soar close to a post-float high and prompted the central bank to intervene to bring it down.

The kiwi started the year at 81.91 US cents, and touched 88.35 cents in July, within a whisper of its post-float high of 88.40 cents, but has since declined to trade recently at 77.85 cents. The expanded trade-weighted index is at 79.13 currently, having started the year at 77.86.

The currency was on a tear in the first half of the year, driven by optimism stemming from the rebuild of earthquake-damaged Christchurch and Fonterra Cooperative Group's record payout to dairy farmers. Reserve Bank governor Graeme Wheeler hiked the benchmark interest rate at four consecutive meetings to ward off inflation, bolstering the kiwi's appeal in a global environment of record low interest rates. In the second half of the year he stepped up efforts to pull the kiwi back down, citing weakening commodity prices, and intervened in the currency market to help push it down through key support levels.

"The year started with a lot of hope for the New Zealand dollar, supported by the fact that the economy was going to be going well, along with the sugar rush from Christchurch, and hopes that the Reserve Bank would start raising the official cash rate," said Peter Cavanaugh, senior adviser at Bancorp Treasury Services. "Then the Reserve Bank stopped, global growth appeared to be struggling and we saw a fall in commodity prices, notably dairy, which put a cap on the New Zealand dollar, and other commodity prices also fell."

"It has been volatile. It has been ups and downs in the extreme," Cavanaugh said.

Heading into the end of the year, the kiwi is close to record highs against the Australian dollar and is also strong against the yen and the euro, reflecting comparatively weaker economies where policy makers are expected to introduce more stimulus. That could see Wheeler continue his campaign against the "unjustified and unsustainable" kiwi in 2015.

Meanwhile, the US dollar is ending the year on a high note, as traders bet a recovery in the world's largest economy will see the Federal Reserve hike interest rates next year.

"2014 has ended with signs of a resurgent US dollar, particularly against the euro and the yen whose central banks are throwing more money at their economies with the intention of staving off deflation, promoting growth and with the result of a weaker currency," said Bancorp's Cavanaugh.

"The New Zealand economy is not doing badly, particularly against most of our trading partners, we are actually doing jolly well," he said. The currency may track beside, or a fraction behind, the stronger US dollar in 2015, compared with its weaker peers, Cavanaugh said.

The broad measure of the New Zealand currency, the Reserve Bank's trade-weighted index, underwent changes this month to better reflect the currencies of the nation's biggest trading partners. The TWI hit a record this year and some economists say its future gains may be muted by the changes which will give it greater exposure to currencies such as the yuan and less exposure to the US dollar.

The US wound down its quantitative easing stimulus programme this year and other central banks will be eyeing how the Fed transitions to tighter monetary policy in a low-inflation environment.

"The spotlight will be on central banks again," Cavanaugh said. "There's been no inflation around for awhile but the dramatic fall in oil prices and energy costs has exacerbated that around the world."

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