BNZ foresees 10c fall in Kiwi

Global economic problems will cause the New Zealand dollar to plunge against its US counterpart, a leading economist says.

BNZ chief economist Tony Alexander believes the credit crunch and the potential for the New Zealand economy to shrink will eventually show through as a US10c decline in the value of the Kiwi dollar this year.

That would help exporters and economic growth.

The Reserve Bank will also contribute to a fall, Mr Alexander said, by easing monetary policy and causing interest rates to fall.

Rate cuts would come into play when the economy became "a bit sick", widening the growth differential between New Zealand and trading partners such as Australia.

"The Kiwi dollar has got a 10c fall in it at some point this year [judging from] the growing negative evidence from overseas in terms of the credit crunch and the extent of the downturn in the New Zealand housing market."

A significant fall was more likely in the second half of 2008, and could match falls of about US10c in 2004, 2006 and 2007. But this time a movement down was likely to stick.

Westpac market strategist Michael Gordon sees risks of the currency hitting a pothole but expects it to recover to US81c in the September quarter and US82c in the December quarter.

Before then, negative influences on the local economy were reflected by falling business confidence.

Four rate increases last year took the official cash rate to 8.25 per cent. This, together with higher funding costs for banks, meant consumers and businesses were being hurt by mortgage and loan costs.

"It's clearly starting to pinch both households and businesses."

BNZ currency strategist Danica Hampton expects the dollar to trade in a range of US79c to US82c in the next few weeks.

"There's two counteracting forces going on at the moment. You've got the economic slowdown in New Zealand that's helping cap the topside but at the same time you've still got this weaker US dollar sentiment that's providing some support on dips."

In the next six months the Kiwi was more likely to fall than rise, Ms Hampton said.

"As the market comes round to our view that New Zealand growth is slowing more rapidly than most of our trading partners, our currency should come under pressure."

The forecast for the end of June was US78c, falling to US76c by the end of September.

- © Fairfax NZ News