The nation's currency is a favorite for the carry trade, where funds borrowed in countries with lower interest rates are invested in places such as New Zealand, where the record 8.25 percent rate is the highest of Aaa rated economies after Iceland's. A U.S. slowdown may slow New Zealand's economy, reducing the prospect of more rate increases.
The New Zealand dollar fell to as low as 84.32 yen, the lowest since Dec. 6, before trading at 84.46 as at 8:47 a.m. in Wellington, from 86.46 yen in late Asian trading yesterday. It rose 3.5 percent versus the yen last year.
The currency traded at 77.35 U.S. cents, down from 77.45 late in Asia yesterday. It gained 9.8 percent against the dollar in 2007, the most for four years.
New Zealand's official cash rate was increased four times last year as the central bank strove to subdue consumer demand, which it said was bolstering inflation. The rate is 4 percentage points higher than the U.S. target and 7.75 points more than Japan's, luring investors to the higher returns of the country's bonds and bills.
Boosting concern about the U.S. economy, a report yesterday showed manufacturing in the world's largest economy shrank the most for five years last month. The Institute for Supply Management's factory index fall to 47.7, from 50.8 the prior month, lower than the forecast by any economist surveyed by Bloomberg News. U.S. stocks declined, led by banks and computer companies.