New Zealand Dollar Rises for Fifth Day


The New Zealand dollar rose after Finance Minister Michael Cullen cut taxes, easing pressure on the central bank to lower interest rates to support the economy.

New Zealand's currency climbed for a fifth day, its longest run of gains since April 23, on speculation the NZ$10.6 billion ($8.2 billion) in tax cuts over four years will support economic growth. The local dollar was the best performer of the 16 most- active currencies as the extra yield offered by 10-year New Zealand bonds over similar-dated U.S. notes increased to the most since April 30.

The local currency rose to a two-week high of 78.82 U.S. cents before trading at 78.57 cents as of 5:54 p.m. in Wellington from 77.85 cents before the budget was released and 77.94 cents late in Asia yesterday. The New Zealand dollar initially fell as Cullen started his speech at 2 p.m. local time.

The budget boost comes as the New Zealand dollar, the best- performing currency in the past decade, is losing support from the world's biggest investors, who are convinced that interest rates and commodity prices will fall.

Traders expect the Reserve Bank to cut its cash rate by about 1 percentage points in the next 12 months, according to a Credit Suisse Group index based on interest-rate swaps. That compares with bets for a 1.25 percentage point drop before the budget.

The tax reductions will begin on Oct. 1 and increase the weekly take home pay of the nation's 2.2 million workers by between NZ$22 and NZ$55, Cullen said in his 2008/2009 budget released in Wellington today.

New Zealand's benchmark interest rate is the highest of any nation credit rating of Aaa, making the currency a favorite target for so-called carry trades

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them. The risk is currency moves erase gains.

New Zealand government debt fell after Cullen said the budget will go into deficit for the first time since 2000.


TradingEconomics.com, Bloomberg
5/22/2008 6:14:05 AM