N.Z. Dollar Declines to 20-Week Low

New Zealand's dollar fell to a 20- week low against the U.S. currency amid expectations local interest rates will decline and other central banks may raise borrowing costs.

Reserve Bank of New Zealand Governor Alan Bollard last week said he is likely to start cutting the benchmark interest rate from a record-high 8.25 percent this year. Lower borrowing costs will curb demand for the New Zealand dollar as policy makers in Europe and the U.S. contemplate interest-rate increases.

New Zealand's currency dropped as low as 75.03 U.S. cents, the weakest since Jan. 23, before trading at 75.24 cents at 9:10 a.m. in Wellington from 75.49 cents late in Asian trading yesterday. The currency bought 80.89 yen from 80.71 yen.

A report June 9 showed construction fell 6.3 percent in the first quarter, adding to signs of weak economic growth. A second report today may show that export volumes shrank in the three months ended March 31 as a drought crimped milk production.

As Bollard considers lowering borrowing costs, his counterparts are more concerned by accelerating inflation, with some expected to increase benchmark rates.

The Bank of Canada yesterday unexpectedly kept interest rates unchanged after four straight reductions, citing energy prices. Federal Reserve Chairman Ben S. Bernanke this week said he'll ``strongly resist'' any surge in inflation expectations. European Central Bank President Jean-Claude Trichet reiterated he may raise rates as soon as next month.

Higher U.S. rates may curb demand for assets in New Zealand, where the benchmark interest rate is 6.25 percentage points above the Fed's target.

N.Z. Dollar Declines to 20-Week Low

TradingEconomics.com, Bloomberg
6/10/2008 7:25:07 PM