New Zealand's dollar slumped as much as 1.6 percent after the central bank sold the currency, saying its climb to a 22-year high wasn't merited by the nation's economic outlook.
The sales were required because the exchange rate was "unjustified," Reserve Bank of New Zealand Governor Alan Bollard said in a statement in Wellington. It was the first time the central bank has announced the use of a NZ$7 billion (US$5.3 billion) fund for stabilizing the currency, set up in 1990.
The intervention may discourage investors from buying New Zealand's bonds and bills using yen borrowed in Japan, known as carry trading. The New Zealand dollar has climbed 19 percent against the US currency in the past year, causing exporters to shift manufacturing jobs overseas.
"People now know that the New Zealand dollar has a limit," said Michael Gordon, currency strategist at Westpac Banking Corp in Wellington. "It's a lesson on how high the currency can go without consequences."
The New Zealand dollar bought US$0.7484 yesterday morning in London from US$0.7637 in late New York trading on Friday. Earlier it reached US$0.7639, the highest since being allowed to trade freely in March 1985.
The New Zealand dollar fell to ?90.99 from ?92.95 in New York on June 8. The currency has soared 27 percent against the yen in the past year.
"It's a minus for the carry trade and a positive for the yen," said Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. "There is a risk that carry trades will be unwound."
The local dollar slid to A$0.8883 against the Australian currency from as high as A$0.9036.
Australia's dollar has also benefited from carry trading, gaining 13 percent in the past 12 months, the third-best performance among major currencies after the New Zealand dollar and Brazil's real.
The Reserve Bank of New Zealand joins other central banks in Asia in selling their currencies to buy US dollars. Purchases of dollars by Asian central banks have caused the region's currency reserves to swell seven-fold in the past decade to US$3.37 trillion. The Reserve Bank of India sold rupees to buy a record US$11.9 billion in February.
New Zealand's central bank may have sold as much as NZ$120 million, Westpac's Gordon said. The central bank probably acted yesterday because trading is lower-than-average during an Australian public holiday, giving them "more bang for their buck." Some overseas investors trade the two currencies together, as the countries are both commodity exporters with the top credit rating at Moody's Investors Service, close trading ties and relatively high interest rates.
The central bank sold the currency yesterday because it regards current levels of the exchange rate "as exceptional and unjustified in terms of the economic fundamentals," Bollard said in his statement. He didn't say how much currency was sold.
Central banks intervene in the foreign exchange market when they buy and sell currencies to influence exchange rates.
The stronger currency has prompted some New Zealand companies to shift operations offshore. Click Clack Ltd, which makes airtight containers, said last Friday it was cutting 30 jobs from its Levin operation, after eliminating 70 jobs in Christchurch last month, because the rising local dollar eroded profits. The operations have been moved to China.
Pumpkin Patch Ltd, New Zealand's second-biggest publicly traded retailer, the same day said net profits may decline as much as 7 percent this year because of the currency's gains.
Under an exchange rate controlled by the central bank, the currency was last as strong on May 26, 1982. It rose to US$1.49 in 1973.
The sale was a "symbolic" move, said John Key, leader of New Zealand's opposition National Party and former head of global foreign exchange at Merrill Lynch Europe PLC, from Auckland.
"I'm surprised it hasn't had a bigger impact as intervention is most potent the first time it's used," he said. "These things tend to slow the trend rather than reverse the trend."
The currency may still rise to as high as US$0.80 this year, he said.
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