Dollar declined amid lower growth, inflation forecasts and weaker dairy prices

The New Zealand dollar fell as investors speculate that lower growth and inflation expectations and weaker dairy prices may slow the pace of interest rate increases by the Reserve Bank which has signalled it wants to move rates back to a more 'neutral' level.

The kiwi weakened to 84.20 US cents at 8am in Wellington, from 84.47 cents at 5pm yesterday but remained above its key 84 cent support level. The trade-weighted index slipped to 79.15 from 79.21 yesterday.

The New Zealand dollar has dropped about half a US cent since yesterday morning on speculation the Reserve Bank will pull back the pace and extent of future interest rate increases after the government yesterday trimmed its forecast for its 2015 budget surplus and reduced its projection for near-term economic growth, inflation expectations were lowered in the Reserve Bank's latest quarterly survey of businesses and after a small decline in the latest Fonterra Cooperative Group GlobalDairyTrade auction overnight.

"If we get more of the same, kiwi in its fragile state could fall further," said Peter Cavanaugh, client advisor at Bancorp Treasury Services. "On the other hand, the New Zealand dollar remains underpinned by the yield that it offers the world."

The Reserve Bank has said it is pausing to assess the impact of its four consecutive interest rate hikes so far this year. New Zealand stands out from most other developed countries where interest rates remain at record lows and investors will be looking to the central bank's Sept. 11 monetary policy statement for guidance on whether future interest rate hikes may proceed at a slower pace.

"The pace of their OCR rises was probably not merited," said Bancorp's Cavanaugh. "They are going to be slower to neutral than expected."

A stronger US dollar overnight also weighed on the kiwi after better than expected US housing data buoyed optimism about a pickup in the world's largest economy. US housing starts jumped 15.7 percent to a seasonally adjusted annual 1.09 million unit pace in July, beating the 969,000 rate expected by economists in a Reuters poll.

The New Zealand dollar was little changed at 90.50 Australian cents from 90.45 cents yesterday ahead of testimony from Reserve Bank of Australia Governor to a parliamentary committee today.

The local currency was little changed at 63.20 euro cents from 63.24 cents yesterday and at 86.63 yen from 86.64 yen. The kiwi advanced to 50.66 British pence from 50.51 pence yesterday ahead of the release of the Bank of England minutes from its last meeting.

(BusinessDesk)