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NZ Dollar Cuts Losses after Suspected Intervention

The New Zealand dollar fell on Monday, with traders saying the central bank may have intervened for the second time in a week, but it paired some of its losses as investors bought into the high-yielding currency.

A spokeswoman at the Reserve Bank of New Zealand declined to comment on whether it had intervened on Monday, but market participants said the central bank had stepped in and sold the local currency.

The kiwi dollar initially fell half a cent to a low of around $0.75, but the effect was short-lived and the currency had recovered to around $0.7530 in the morning.

"The market is getting its head around the fact that the RBNZ is not trying to get the massive shift lower in the currency, but just keeping it pinned on the top side," said Sue Trinh, senior currency strategist at RBC Capital Markets.

The New Zealand dollar also recovered against the yen, trading around 93 yen, in sight of a 20-year high of 93.25 yen hit on Friday. It fell about half a yen to around 92.60 yen in the wake of the suspected intervention.

On the central bank's preferred trade-weighted basis, the kiwi was at 73.42 after sliding to as low as around 73.20. The central bank forecast earlier in the month the trade-weighted index to average 70.2 in the first half of 2007 and 72 in the second half.

Last Monday, the central bank intervened for the first time since the currency was floated in 1985 after the kiwi had hit $0.7640 in the wake of a surprise interest rate hike to 8 percent on June 7.

New Zealand's interest rates -- the highest in the industrial world -- have attracted inflows in the so-called carry trade, when investors borrow in low-yielding currencies, such as the yen, to invest in high-yielding ones.

The kiwi spent much of last week in a range of $0.7450-$0.7510 after the intervention, but it resumed its move higher on Friday after the Bank of Japan kept rates steady and U.S. data showed benign inflation pressures.

"I think one of the key lessons out of this is that the market shouldn't get too hung up about there being some sort of line in the sand that the Reserve Bank is trying to defend," said Nick Tuffley, chief economist at ASB Bank.

"It's giving us the signal that they are prepared to come in every now and then when there is a bit of a lift in the New Zealand dollar for reasons that are not much to do with New Zealand."

The central bank said last week it had intervened because the currency was at unjustifiably high and exceptional levels.

It has previously said it would step in if the currency was at exceptional levels not justified by economic fundamentals, if the intervention could be expected to succeed, and if it was consistent with the central bank's goal of achieving price stability.

It has also said it would not try to go against the market trend and would be more likely to intervene in times when there was a disorderly market.