New Zealand Dollar Rises Most in Three Months

New Zealand's dollar rose the most in three months against the U.S. currency after the Federal Reserve lowered its benchmark interest rate, increasing the appeal of the South-Pacific nation's fixed-income assets., Bloomberg 1/23/2008 8:52:31 AM

The local dollar gained against 15 of the 16 most-traded currencies as traders were lured back to the so-called carry trade, where funds borrowed in countries with lower interest rates are invested in places like New Zealand that offer higher returns. The 0.75 percentage point cut by the Fed widened the advantage for New Zealand's central bank rate to 4.75 percentage points, the most since October 2004.

The currency strengthened 1.8 percent, the most since Oct. 23, to 75.98 U.S. cents as of 5:09 p.m. in Wellington, from 74.62 cents in late Asian trading yesterday, when it fell to a three-month low. New Zealand's dollar also climbed versus Japan's currency, adding 1.8 percent to 80.87 yen, from 79.41 late in Asia yesterday. It slid to 78.19 yen yesterday, the lowest since Sept. 10.

The New Zealand currency is a popular carry trade target because its record 8.25 percent official cash rate is the highest after Iceland's among Aaa rated nations. It is 7.75 points more than Japan's 0.5 percent rate, the lowest of major economies.

It has gained 7.9 percent against the dollar since Sept. 18, when the Fed began its latest series of rate cuts to reignite an economy dogged by the worst housing slump in at least 16 years.

Stocks worldwide tumbled yesterday with markets in both Europe and Australia entering bear phases on concern a U.S. slowdown will start to cool global economic growth and reduce exports for commodities such as iron ore and copper. Prices for New Zealand's main commodity export, dairy products, have doubled the past two years to near a record.

Speculation Reserve Bank of New Zealand Governor Alan Bollard will keep the country's official cash rate at the record high when he reviews monetary policy in Wellington tomorrow may also keep the local currency supported, Rothfield said.

New Zealand's annual inflation rate is at 3.2 percent, above the central bank's 1 percent to 3 percent preferred band. Bollard may be forced to keep rates high for some time or even to increase them again in order to keep those inflationary pressures under control.

New Zealand Dollar Rises Most in Three Months