Dollar hits high against greenback

The New Zealand dollar has touched a two-year high against the greenback.

Left unchecked, the climb is likely to suck more wind out of inflation and further depress expectations of interest rate rises.

ANZ chief economist Cameron Bagrie said traders’ position on the dollar was the second ‘‘longest’’ on record, meaning big bets were being taken on the currency’s strength.

That was a turnaround from April when ‘‘shorts’’ were at a record, and Bagrie said it might signal the currency market was close to a turning point that would see the kiwi fall.

‘‘The market can turn on a dime. The warning signs are starting to flash a bit,’’ he said.

‘‘But at the moment we seem to be getting swamped by US-dollar weakness.’’

People were now questioning whether the United States Federal Reserve would increase interest rates in the coming year, he said.

The kiwi hit a high of US74.56 cents yesterday – a hundredth of a cent above its spike in August last year – before retreating slightly to US74.45c.

The New Zealand dollar is also pummelling the pound – trading at £0.572 – though it is not close to any significant highs against the euro or the Australian dollar.

Bank of New Zealand’s head of research, Stephen Toplis, said most of the movements in the cross-rates were down to developments overseas.

‘‘Having said that, what it does reflect is that New Zealand looks in an extraordinarily good position in terms of its economic strength and outlook relative to a lot of other countries.

‘‘To the extent that the currency is effectively the ‘share price’ of an econ- omy, you are going to get people who want to purchase New Zealand dollars.’’

The US dollar had been weakened by a run of less inflationary data, coupled with suggestions that US President Donald Trump would not be able to push through policies that would push up inflation, he said.

The kiwi’s strength would have the Reserve Bank thinking about lowering its forecasts for future inflation ‘‘by a reasonable amount’’, Toplis said.

‘‘I don’t believe it would be seriously contemplating lowering interest rates at this juncture,’’ he said.

‘‘If you looked at it purely in terms of the inflation target, then there would certainly be some argument for pushing interest rates lower.’’

But viewed ‘‘more holistically’’ – taking into account tightness in the labour market and ‘‘financial stability strains’’ – it would be hard to argue for a cut, he said.

Bagrie agreed markets were not taking seriously the Reserve Bank’s suggestion that the next movement in interest rates could just as likely be down as up. ‘‘The markets are still siding that the next movement is going to be up.’’

But that was with a rise not expected until the second half of next year ‘‘which is a long way off’’, he said.

The currency movements are negative for New Zealand companies that export to the US and the United Kingdom.