New Zealand Dollar Expected to Fall Further, Points to Possible Rate Increase

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New Zealand Dollar Expected to Fall Further, Points to Possible Rate IncreaseThe New Zealand dollar fell to the lowest level in six months in the past month and looks set to decline further, creating more room for the Reserve Bank of New Zealand to hike interest rates before the end of the year.

The currency has declined by 5 percent to about $0.8400 versus the U.S. dollar over the past month, close to the levels last seen when the central bank began increasing interest rates in March. The kiwi has fallen mostly due to projections of weaker dairy prices and slower pace of interest rate increases, not because of expectations of increased U.S. interest rates.

“In isolation, if the currency falls at a faster pace than the RBNZ expected, or to a lower level than they expected, then there’s a greater need of tighter policy in response to that,” Hamish Pepper, a Singapore-based currency strategist at Barclays Capital, told Reuters.

The central bank is in a tricky situation because a weaker kiwi helps limit inflation and hike interest rates, but it can also promote import inflation. The RBNZ has hiked interest rates 100 basis points since March, bringing them to 3.5 percent, the most since early 2009. It targets neutral interest rates of around 4.5-5.0 percent, preferably by late next year or early 2016.

The RBNZ has increased interest rates four consecutive times, pushing the currency higher, though it expressed concern that the stronger currency may make the nation’s exports uncompetitive.  The bank has repeatedly talked the New Zealand dollar down, saying its excessive strength is unsustainable and said it may halt any further interest rate increases for a considerable time. To register for a free 2-week subscription to ForexMinute Premium Plan, visit www.forexminute.com/newsletter.

To contact the reporter of this story; Yashu Gola at yashu@forexminute.com