29 Sep 2014

Dollar drops after RB confirms sell-off

8:05 pm on 29 September 2014

The New Zealand dollar has plummeted to its lowest level this year after the Reserve Bank confirmed it sold $521 million last month.

The dollar fell as low as US77.07 cents - its lowest this year - before rising again. Just after 5pm it was trading at US77.58 cents.

The market had been rife with suggestions the bank had moved its hand to reduce the value of the kiwi, and that was confirmed in official data released this afternoon.

The dollar fell on the news, reaching a further low point for the kiwi after it fell to a one-year low this morning.

At its peak in July it was trading at US88.36 cents.

Last week, Reserve Bank governor Graeme Wheeler talked down the kiwi, saying the currency's level was unjustified and unsustainable.

Reserve Bank Governor Graeme Wheeler.

Reserve Bank Governor Graeme Wheeler. Photo: RNZ

Mr Wheeler said although global dairy prices had fallen 45 percent since February, last month the kiwi was still 1 percent higher than it was when dairy prices began to fall.

At the time, Westpac chief economist Dominick Stephens said the governor could be wanting to explain his actions ahead of the figures released today.

A stronger greenback and falling dairy prices have also contributed to the weakening kiwi.

In April last year the Reserve Bank sold $256 million.

Prime Minister John Key said it was important to understand the Reserve Bank Act allowed the Reserve Bank to intervene if they believed the currency was out of balance or significantly over or under valued.

"My experience of the Reserve Bank, ever since they've had that authority, is they've acted very cautiously and wisely in doing so."

Foreign exchange adviser Derek Rankin said the New Zealand currency would not stay down unless the Reserve Bank was prepared to cut interest rates.

He said the sell-off was expected but the effect would not last if the central bank left interest rates alone.

"International investors are not necessarily going to be dissuaded from investing in New Zealand just because the Reserve Bank says that they want a lower currency and intervenes.

"So in the long run, central banks can't influence the currencies. They can have a short-term impact but not in the longer term."

Get the new RNZ app

for ad-free news and current affairs