Dollar falls on weak dairy prices, greenback strength

The New Zealand dollar fell more than a US cent against the US dollar as traders absorbed the knock-on effect of weaker dairy prices on the domestic economy and the greenback strengthened in the wake of Japanese prime minister Shinzo Abe's confirmation of a snap election and a delay in a sales tax hike.

The New Zealand dollar fell to 78.70 US cents at 5pm in Wellington from 79.34 cents yesterday. It declined to 92.24 yen from 92.52 yen yesterday, having reached a seven-year high of 93.22 yen overnight. Prices of dairy products, New Zealand's biggest export commodity, fell in the latest GlobalDairyTrade auction to the lowest level in more than five years, stoking speculation Fonterra Cooperative Group will lower its milk payout forecast, eroding the income of farmers, with flow-on effects to the broader economy.

"There's plenty of people saying Fonterra will have to be revising down," said Stuart Ive, senior dealer at OMF. "If farmers are paid out less money then there's a knock-on effect for surrounding industries."

"We may see the kiwi pull back to 78 (US cents), or maybe sub-78 this week," Ive said.

The New Zealand dollar has weakened as the greenback found broad strength, Ive said. The kiwi had rallied against the yen in the run-up to Abe's announcement  on a 'buy the rumour, sell the fact' basis.

Japan's Abe confirmed widespread speculation by announcing he would delay plans for an unpopular second hike in the consumption tax scheduled for October next year by 18 months and would dissolve the lower house of parliament on Nov. 21 to seek a mandate at the polls next month for his set of economic policies, known as Abenomics, and includes economic reforms that have proven difficult to implement. The announcement came after data this week showed the Japanese economy has fallen into recession, with two quarters of negative growth.

The local dollar fell to 90.73 Australian cents from 90.94 cents and was down to 62.88 euro cents from 63.60 cents yesterday. It fell to 50.41 British pence from 50.69 pence. The trade-weighted index fell to 78.17 from 78.70.

(BusinessDesk)