Market takes currency intervention hint

Last updated 10:46 24/07/2014

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The New Zealand dollar plunged after today's official cash rate announcement, as the Reserve Bank hinted at the prospect of currency intervention.

Reserve Bank Governor Graeme Wheeler lifted the cash rate from 3.25 per cent to 3.5 per cent, as widely expected.

He indicated the rate could be held at that level until December and possibly into next year.

He also took aim at the New Zealand dollar, describing its current strength as "unjustified and unsustainable" with potential for a significant fall.

Markets reacted swiftly to his comments, with the kiwi falling by almost 1 cent against the US dollar, from US87c to US86.1c, in a matter of minutes.

It also dropped sharply against the euro, down 64.4 euro cents to 63.9 euro cents, the Australian dollar, from A92.08c to A91.12c and against the yen, from 88.3 yen to 87.45 yen.

The trade-weighted index, which measures the kiwi against a basket of currencies, plunged from 81 at shortly before the 9am OCR announcement to a low of 80.14 at 9.10am.

Tim Kelleher, head of institutional foreign exchange sales at ASB, said both the OCR increase and subsequent pause were not a surprise.

However, the comments on the high dollar had made their mark.

"They used one of their intervention criteria, using the words 'unjustified and unsustainable', which would give them carte blanche to intervene," he said.

The central bank would be watching the TWI, which remains near its all-time record high despite dairy prices having dropped more than 30 per cent since February, Kelleher said.

The falls against the US, the yen and the Aussie dollar had been particularly big, particularly after yesterday's Australian CPI showed stronger than expected underlying inflation, he said.

"Those who were predicting parity parties are looking fairly forlorn," Kelleher said.

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