Dollar TWI hits fresh record as investors lured to higher yields

New Zealand's trade-weighted index touched a fresh record as investors take advantage of borrowing in lower interest rate markets overseas to invest in New Zealand's higher yielding market.

The TWI reached an all-time high of 81.71 and was at 81.52 at 5pm in Wellington, from 81.19 at 8am and 81.42 at 5pm yesterday. The New Zealand dollar touched a fresh three-year high of 87.94 US cents and was at 87.79 cents at 5pm from 87.59 cents at 5pm yesterday.

Demand for New Zealand's currency has stepped up after a report this week showed US gross domestic product shrank more than expected in the first quarter, underpinning expectations that New Zealand interest rates will continue to rise while the Federal Reserve keeps US interest rates at record lows. New Zealand's central bank has hiked the benchmark rate three times so far this year and is expected to raise the rate again next month, contrasting with central banks in major economies such as Europe, Japan and the US which continue to provide stimulus.

"Yield, yield and yield, that's the primary reason" for the New Zealand dollar's strength, said OMF senior foreign exchange dealer Mark Johnson. "It attracts favour as a carry currency. It's generally the offshore buying interest that we have seen.

"There is an expectation of another surge higher tonight if the US dollar continues to test lower," Johnson said. "The US dollar is falling out of favour at the moment. The market is looking at some of the data and they are taking the view that the Fed is probably a long way off rate hikes."

OMF's Johnson said the kiwi may make an attempt on its August 2011 record high of 88.40 US cents if the Reserve Bank hikes rates next month as expected. While governor Graeme Wheeler won't want to stoke further demand for the currency by continuing to hike, he has got to keep "cranking on" with the rate hikes in an attempt to slow the housing market as local banks continue to offer cheap fixed-term mortgage rates through overseas funding, Johnson said.

Still, investors need to be wary that the kiwi is not a one-way bet and could decline should a more risk averse tone emerge, he said.

Currency traders and strategists were split on the likely direction of the kiwi at the start of this week, with four expecting a decline, three predicting it would gain and three picking it to remain largely unchanged. The local currency was expected to trade between 85 US cents and 88.20 cents this week, according to the BusinessDesk survey. The kiwi finished up at 86.96 US cents at the New York close of trading last week.

Today, the New Zealand dollar touched a 13-month high of 64.60 euro cents and was trading at 64.45 cents at 5pm from 63.76 cents at 5pm yesterday.

The kiwi edged lower to 93.07 Australian cents from 93.11 cents yesterday, slipped to 51.53 British pence from 51.55 pence and weakened to 89.07 yen from 89.13 yen.

(BusinessDesk)