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NZ's Finance Minister Says Currency Is Overvalued

CNBC.com
Thursday, 18 Oct 2007 | 3:31 AM ET

New Zealand's finance minister said on Thursday the country's currency, which has fallen more than 7 percent against the U.S. dollar during the global credit squeeze, was overvalued and he expected it to fall further.

"I think it's probably somewhat overvalued. But for the moment, it's looking very high against the U.S. (dollar) because the U.S. dollar is so weak," Finance Minister Michael Cullen said during an interview with CNBC's 'Asia Squawk Box' Thursday. "Against the Australian and other currencies, we're not so far off what we might regard as a reasonable equilibrium."

Kiwi Dollar Outlook
The kiwi dollar is expected to edge up higher to $0.77 cents against the dollar forecasts Claudio Piron, head of Asia FX research at JPMorgan, speaking to CNBC's Arnold Gay.

The currency, known as the kiwi , rallied in July to its highest level since being floated 23-years ago, boosted by yield-hungry investors attracted by an official interest rate of 8.25 percent -- the highest in the industrialized world.

But it has fallen sharply as investors reined in risk during the global credit logjam and as markets factored in the possibility that New Zealand interest rates had peaked. The ten-year moving average for the Kiwi is roughly about 60 U.S. cents.

"We expect to be well above that given the U.S. (dollar). When you look at the pound, it's back over $2 for the first in a heck of a long time. The euro's at $1.42/43 -- a historic high since it was created. The Aussie's at about 88/89 U.S. cents. I think we just have to accept that for the moment, we're going to have a high exchange against the U.S. (dollar) because the U.S. (dollar) is very weak," Cullen told CNBC's Martin Soong.

The equilibrium level is a measure used by economists to estimate the long-term fair value of a currency. Cullen declined to specify his estimate of the kiwi's equilibrium level, but said economists see it around the high 50 U.S. cents to low 60 U.S. cents area.

Cullen said he expected further declines in the New Zealand dollar, with any sharp fall posing an inflationary risk to the economy. "If we're looking at medium term, I am sure there will be some softening in the Kiwi."

But Cullen added that in the short term, it was very hard to predict how the New Zealand dollar would perform. "Goodness knows given the volatility of the international markets. It really is a roller-coaster ride for many currencies around the world," Cullen said.

Inflation

Data on Monday showed annual inflation unexpectedly dropped to 1.8 percent in the third quarter, towards the lower end of the Reserve Bank of New Zealand's target range of 1 percent to 3 percent, though the fall was mainly due to one-off factors.

The finance minister said the economy was expected to post annual growth of around 3 percent over the next two to three years, similar to forecasts from the central bank last month.

The central bank has lifted rates four times this year by a total of 1 percentage point to 8.25 percent on concerns over strong domestic spending, particularly in the residential property market.

But in a Reuters interview, Cullen said he was finally seeing signs of a slowdown in the housing
market. "It's taken a long time for that to happen but I think that it is starting to happen," he said.

Most analysts in the latest Reuters poll do not expect the central bank to lift rates further, although they don't expect rates to come down until the middle of next year.

Cullen said there would be personal income tax cuts in next year's pre-election budget, but the scope had not yet been decided.

The government would need to exercise caution in fiscal spending, heading into general elections next year, given the central bank has cited that as an inflation threat, he said. "We can't turn the tap on so that we drown in our own bath," Cullen said.