Dollar touches fresh lows as weakening economy stokes calls for interest rate cuts

The New Zealand dollar touched its lowest level in more than five years against the greenback and the pound, and its lowest against the Australian dollar in a year and a half, after signs the economy is slowing stoked expectations the Reserve Bank would make further interest rate cuts.

The kiwi dropped as low as 67.45 US cents, and was trading at 67.73 cents at 8am in Wellington, from 68.06 cents at 5pm yesterday. The local currency touched 42.92 British pence and was trading at 43.10 pence at 8am, from 43.26 pence yesterday. It touched 87.64 Australian cents, and was trading at 87.78 cents at 8am from 88.64 cents yesterday.

New Zealand's economy is showing further signs of weakening, after business confidence turned pessimistic for the first time in four years, while growth in building consents stalled, and farmer confidence slumped to the lowest level in a decade amid low dairy prices. Traders are pricing in an 84 percent chance that Reserve Bank governor Graeme Wheeler will reduce the benchmark interest rate at this month's meeting, according to the overnight index swap curve, and Deutsche Bank said a further two cuts were likely in September and October, taking the benchmark to 2.5 percent.

"Deutsche Bank has been very aggressive in its call for rates to be at 2.5 percent by the end of the year, which is another 75 basis points worth of cuts," said Tim Kelleher, ASB Bank head of institutional FX sales New Zealand. "It puts us back on a rate cut path. Because of that and lower yield, the money will go to markets with have got more liquidity for the same value. We have certainly seen some pretty strong selling of kiwi."

ASB's Kelleher noted the 20-year average for the kiwi was 65.50 US cents.

Tonight, traders will be eyeing the latest GlobalDairyTrade auction, with average prices at the last auction falling to the lowest level since August 2009.

The New Zealand dollar was little changed at 60.74 euro cents from 60.79 cents yesterday as Greece is expected to default on a loan from the International Monetary Fund amid reports the country has asked for a two-year bailout and debt restructure.

The local currency slipped to 82.91 yen from 83.22 yen yesterday. The trade-weighted index fell to 70.81 from 71.19 yesterday.

(BusinessDesk)