NEW YORK: The New Zealand dollar surged to its highest in more than a year on Thursday after its central bank cut rates by 25 basis points to 2.0 percent, a smaller cut than some investors had expected.
The Reserve Bank of New Zealand said a strong kiwi was driving it to cut rates and that it saw potential for one more reduction by year-end and another by mid-2017.
Traders said that was too slow relative to some expectations of a 50-basis-point cut, going into Thursday’s meeting.
The New Zealand dollar rose to $0.7351, its highest since May 2015, before settling back to $0.7253, up 0.82 percent on the day.
“The RBNZ has made it clear for a long time that it wants to see the kiwi depreciate, sometimes less and sometimes more explicitly,” said Ulrich Leuchtmann, currency strategist at Commerzbank. “… it does not deliver enough to achieve this.”
The kiwi and Australian dollar have been buoyed by the allure of relatively high bond yields. New Zealand dollar 10-year government bonds have a yield of around 2.1 percent, compared with negative yields in Japan and Germany.
Investors have been encouraged to take on extra risk due to low volatility in foreign exchange and other markets as central banks in Europe and Japan add stimulus – even if they are uncomfortable with some valuations.
“Investors are saying assets are expensive, but the environment right now is very positive for adding risk,” said Steven Englander, global head of foreign exchange strategy at Citigroup in New York.
The US dollar was marginally higher against a basket of six major currencies, rising 0.08 percent to 95.735, after falling on Wednesday.
The greenback has traded within a relatively tight range this month as investors wait for new indications on when the Federal Reserve is likely to next raise interest rates.
Retail sales data for July on Friday is the next major U.S economic indicator. Investors are also focused on Fed Chair Janet Yellen’s speech at the Federal Reserve’s Jackson Hole symposium on Aug. 26.
Sterling hit a one-month low of $1.2936 amid more signs of weakness in Britain’s housing market.
A housing report from the Royal Institute of Chartered Surveyors added to signs the British economy was slowing, which have weighed on the pound since June’s vote to leave the European Union.