N.Z. Central Bank says it may keep selling currency
Central bank of New Zealand said it may continue to sell its dollar, trading near a 22-year high, and investors should be "cautious" about expecting the currency to rally further.
"The exchange rate is not a one-way bet," Deputy Governor Grant Spencer said in an article prepared for publication. "Foreign exchange intervention is an ongoing process." The central bank on June 11 sold New Zealand's dollar for the first time since the currency was allowed to trade freely in 1985. The New Zealand dollar has gained 2.1 percent since then, and is the world's best-performing major currency in the past 12 months, as the nation's relatively high yields attract investors who can borrow cheaply in yen, known as a carry trade.
"It looks as though they're a little bit stung by the New Zealand dollar's strength since they intervened," said Ray Attrill, director of research at 4Cast Ltd. in Sydney. "They're trying to defend their actions." The New Zealand dollar fell to 76.35 U.S. cents as at 6:15 p.m. in Wellington, from 76.80 cents yesterday. It rose as high as 76.93 cents earlier today. The currency traded at 76.39 cents before the bank sold on June 11. It has gained 26 percent in the past 12 months. It fell to 93.53 yen today.
Spencer's comments follow statements yesterday from Japan's Finance Minister Koji Omi that investors were taking risks in one-way bets against the yen, which weakened to a 4 1/2 year low against the dollar last week.
The yen and the New Zealand dollar are at opposite ends of the carry trade because New Zealand's benchmark interest rate is 7.5 percentage points higher than the Bank of Japan 0.5 percent overnight rate. The Reserve Bank has a policy of buying or selling the currency to influence the level only if it is exceptionally high or low and the level is unjustified by economic fundamentals, according to a statement on the bank's Web site. It used the provision for the first time this month and has intervened twice more since the, according to currency traders.
With the nation's current account deficit at about 9 percent of gross domestic product, the exchange rate "cannot be sustained at current levels over the medium term," Spencer said. A report tomorrow will probably show the deficit was 8.6 percent of GDP in the year ended March 31, according to a Bloomberg News survey of 13 economists.
Spencer said trying to lower the currency doesn't run counter to monetary policy. The central bank has increased the official cash rate three times this year to a record 8 percent, to quell consumer spending and a housing boom that has stoked inflation. "Intervention is about rebalancing monetary policy pressure," he said. "It does not fundamentally alter monetary policy and does not signal a future easing of conditions."
Currency sales "can help to moderate peaks in the exchange rate and the length of time we spend at peak levels," Spencer said. "It does not attempt to defend a particular level." Central banks intervene in the foreign exchange market when they buy and sell currencies to influence exchange rates.
Source: Bloomberg
Date: 27.06.2007 [ID: 45]