Last updated: November 5, 2009 10:48 pm

NZ dollar falls after central bank warning

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The New Zealand dollar suffered on Thursday after the Reserve Bank of New Zealand sought to damp enthusiasm over the country’s prospects.

Alan Bollard, governor of the RBNZ, said the economic recovery in New Zealand was likely to be slower and more vulnerable than the upturn taking place in Australia.

He said this was a difference that financial markets did not seem to appreciate, adding that “if financial markets can’t see the differences, they will eventually lose money”.

Following the Reserve Bank of Australia’s decision to begin tightening monetary policy last month, speculation has mounted that the RBNZ would follow suit, sending both countries’ currencies sharply higher.

Underscoring Mr Bollard’s comments were figures on Thursday showing NZ unemployment rose by more than expected in the third quarter to its highest level in nine years.

Analysts said the data highlighted not only the depth of the recession in the country but also that wage inflation was likely to remain subdued for some time, suggesting the RBNZ could afford to be patient in removing emergency monetary accommodation.

“The market may still be ahead of itself in pricing in [NZ] rate hikes,” said Marc Chandler at Brown Brothers Harriman. “The fundamentals do not favour the New Zealand dollar over the Australian dollar.”

Late in New York, the New Zealand dollar had eased 0.4 per cent to $0.7217 against the US dollar, 0.3 per cent to Y65.50 against the yen and 0.4 per cent to NZ$1.2616 against the Australian dollar.

Meanwhile, the pound recovered from early losses against the dollar after the Bank of England extended its asset purchase plan by less than some had forecast.

The Bank, as universally expected, kept interest rates on hold at 0.5 per cent after its policy meeting, but announced an extension to its policy of quantitative easing by expanding its asset purchase programme by £25bn to £200bn.

Forecasts had been split ahead of the decision as to whether the Bank would deliver an expansion of £25bn or a more aggressive £50bn move, and sterling rallied on the announcement of the amount.

“The market believes that this could be the Bank’s final injection of liquidity and this has been good news for the ailing pound,” said Mark O’Sullivan at Currencies Direct.

He urged caution over the sustainability of the pound’s gains, however: “With the UK economy facing strong headwinds going into 2010, the market can not rule out the Bank revisiting its liquidity measures just yet.”

The debate over whether the Bank would increase its asset purchase programme has heated up in recent days as surveys of activity in the UK manufacturing and services sectors outstripped expectations.

Those figures seemed to contradict data last month that showed an unexpected contraction in UK gross domestic product in the third quarter.

The pound, which had traded down to a low of $1.6465 against the dollar ahead of the decision, recovered to stand up 0.1 per cent at $1.6578. Sterling also rose 0.1 per cent to £0.8966 against the euro.

The euro held steady at $1.4867 against the dollar as the European Central Bank kept interest rates on hold at 1 per cent , as expected, after its policy meeting.

The dollar was little changed elsewhere due to caution ahead of Friday’s US employment report, steady at about Y90.75 against the yen and flat at SFr1.0165 against the Swiss franc.

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