N.Z. Dollar May Top 22-Year High as Traders Test Central Bank

The New Zealand dollar may rise to a new 22-year high as investors test the central bank's currency intervention policy and are attracted to the nation's higher- yielding assets.

The currency yesterday rose to its highest since being allowed to trade freely in 1985, and above the level it reached before the central bank sold New Zealand dollars June 11, calling the gains ``unjustified.'' The currency has gained 25 percent against the U.S. dollar the past 12 months, as a record 8 percent benchmark rate lures investors to the country's debt.

``It could test higher as the market tests the central bank out and sees if it will respond,'' said Alan Ruskin, chief international strategist at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``And the whole issue of yield is at the core of these gains.''

The currency bought 76.35 U.S. cents at 11:01 a.m. in Wellington from 76.18 cents in late Asian trade yesterday, when it rose to a 22-year high of 76.57 cents. The local dollar may exceed that level ``in the next couple of days,'' Ruskin said. ``There's no clear top now.''

New Zealand rates are 2.75 percentage points more than the key U.S. borrowing cost and 7.5 percentage points higher than Japan's benchmark rate, the lowest of the major economies.

The New Zealand dollar fell as much as 1.8 percent after the bank's June 11 sales, the first intervention announced by the central bank since it set up a fund for stabilizing the currency in 1988.

Gains Versus Yen

Central banks intervene in the foreign-exchange market when they buy and sell currencies to influence exchange rates. The currency lost as much as 1 percent June 18, after reports from some banks that the Reserve Bank had sold again.

New Zealand's dollar also gained against Japan's currency, trading at 94.47 yen, from 94.19 late in Asia yesterday. It reached 94.69 yen yesterday, the highest since October 1987.

So-called carry trades, where investors borrow cheaply in yen to invest in higher-yielding assets elsewhere, have buoyed the New Zealand dollar 13 percent against the yen since the beginning of the year.

Individual Japanese investors, who have set up 600,000 accounts to trade currency with borrowed yen, stepped up purchases of the New Zealand dollar after the Reserve Bank said it sold the currency.

The prospect of further central bank intervention may cap the New Zealand dollar's gains, said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington.

``Market participants are wary of chasing the currency higher,'' she said. ``Many traders are nervous about whether we will see more activity from the Reserve Bank.''

New Zealand government bonds were unchanged. The yield on the benchmark 10-year note remained steady at 6.78 percent, according to data compiled by Bloomberg.

source:www.bloomberg.com