Dollar falls as Reserve Bank reveals action

The Reserve Bank has put its money where its mouth is by shorting the New Zealand dollar at a time when the kiwi was high and the central bank believed it was likely to fall over time.

The dollar fell below US78c for the first time in more than a year after the Reserve Bank published figures showing it intervened in foreign exchange markets in August.

The kiwi dropped to US77.64c, the lowest level since August 30 last year, after data showed the central bank sold a net $521 million into currency markets in August, confirming speculation based on the rhetoric from the bank's governor, Graeme Wheeler, it had been active in the market that month.

The currency had traded at US78.27c immediately before the data release.

The dollar continued to fall and was trading at US77.54 at 5pm, down US1.5c on Friday at the same time.

ASB chief economist Nick Tuffley said the impact of the Reserve Bank's actions on markets had been more about sending a signal to markets the central bank did not see the recent strength of the kiwi as sustainable, helping to put downward pressure on the dollar when it was already starting to retreat.

''The Reserve Bank is being more activist in its attempts to pull down the dollar through both talking more forcefully about the unsustainability of the high dollar and keeping the market off balance.

"These actions are intended to have market participants realise a higher dollar is not a one-way bet.''

The Reserve Bank had been pragmatic about the effectiveness of active intervention, he said.

But it was having some success in reinforcing the downward trend in the dollar which had been in place since July.

Last week's statement about the dollar was one example of engineering added weakness in the dollar without having to take on added foreign exchange rate risk, Mr Tuffley said.

Under Mr Wheeler, the Reserve Bank was prepared to try different actions to achieve its objectives.

Another example was the introduction of high loan-to-value ratios (LVRs) restrictions to try to cool the housing market, something the previous governor Alan Bollard saw as having no value.

''We don't rule out further tactical actions from the Reserve Bank to keep downward pressure on the dollar. Now the dollar is trending down, it is easier to reinforce that trend than fight against an upward trend,'' Mr Tuffley said.

Westpac currency strategist Imre Speizer said the market had earlier speculated the central bank sold the dollar on Monday, August 25, early in the New Zealand session, on a day when liquidity was likely to be thin, due to a London holiday.

On that day, the dollar inexplicably fell from US83.97c to US83.36c within a few minutes.

''Market suspicions had some foundation, the Reserve Bank explicitly warning of intervention earlier this year. Note this warning was later repeated at its monetary policy statement on September 11.''

The rhetoric was intensified in a detailed speech on September 25, entitled ''New Zealand's Exchange Rate : Why the Reserve Bank believes its level is unjustified and unsustainable'', he said.

That speech caused the dollar to fall about US1.3c and raised market fears of further intervention measures.

Yesterday's report should at least confirm the central bank was willing to intervene at opportune times, as long as it considered the exchange rate to be too high.

August's intervention was the largest since the ''overt'' intervention in 2007.

The threat of more to come would remain a negative for the kiwi for some time, Mr Speizer said.

New Zealand's currency had already dropped before the release of the Reserve Bank figures, after Prime Minister John Key was reported as saying he preferred a weaker currency, and thought fair value was around US65c, according to the interest.co.nz website.

The August intervention was the first since April last year, when the Reserve Bank sold a net $256 million.

Before that episode, the bank had last confirmed an intervention in mid-2007, when it sold a net $2.36 billion over three months.

It sold a net $1.64 billion over five months in mid-2008, when the kiwi plunged before the global financial crisis.

The latest data showed the Reserve Bank also increased its capacity for currency intervention to $9.56 billion in August from $8.62 billion in July.

dene.mackenzie@odt.co.nz

 


At a glance

• Reserve Bank confirms intervention in currency

• Dollar falls to lowest value in more than a year

• Prime Minister John Key sees US65c as fair value

• Economists not ruling out further intervention


 

 

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