The New Zealand Dollar Will Fall Eventually. By Nicholas Hastings

The New Zealand dollar will no doubt resume its slide against the dollar later this year.

The growing risk of a Chinese yuan appreciation and rising speculation that the time has come for the U.S. to start raising its interest rates will eventually take their toll.

For the time being, though, the New Zealand currency should still attract support, despite the International Monetary Fund's warning late last week that it is as much as 25% overvalued.

See the New Zealand's dollar's recent performance:



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Lingering concerns that most other western economies remain mired in recession, especially while Greece's debt problems remain unresolved, and expectations that the Reserve Bank of New Zealand will start increasing its rates in June will ensure that the New Zealand dollar--or kiwi--remains attractive.

Like its Australian counterpart, the kiwi rallied for most of last year as the New Zealand economy was one of the first to bounce out of the global credit crunch, helped by the country's close association with China.

Estimates that China's economic output will grow by as much as 12% in the first quarter of this year, and new data showing that the country's manufacturing sector--as measured by the purchasing managers' index--is rising even more rapidly than expected, will continue to boost commodity prices and help commodity currencies such as the kiwi.

The support this move provides for the currency could prove limited, however-- especially if speculation over a U.S. rate hike is rising at that time, meaning yield differentials are no longer moving in favor of the New Zealand dollar.

Unlike Australia, which started to slam on its monetary brakes with rate hikes in the fourth quarter of last year, New Zealand has held back, apparently anxious not to let its currency advance as rapidly as the Australian dollar. Its first rate increase is now expected to come in about three months.

A comparison with Australian rates also won't help given that the central bank of that country is poised to raise its interest rates again this week, its fourth hike since the cycle started late last year.

China may also prove to be part of the kiwi's undoing.

As economic data from that country goes from strength to strength, the Peoples' Bank of China is coming under increasing pressure to curb excessive growth and prevent inflation pressures from building--by either increasing interest rates or easing the Chinese currency's peg against the dollar and allowing it to rise.

Or, Beijing could do both.

Whatever the outcome, any sign that Chinese growth is slowing will be bad news for the New Zealand economy and bad news for the kiwi.

So while the currency may have already fallen back from its late 2009 high at nearly $0.7550 to about $0.7050 now, the New Zealand dollar may well linger around current levels for a little while longer before losing some of its recent high-yield attraction and heading lower again.

Early Tuesday in Europe, the New Zealand currency was down at $0.7035 at 0745 GMT from $1.7040 late on Monday in New York, according to EBS.

General market sentiment was being undermined by renewed concerns about Greece's debt rescue plans. Various reports suggested that Greek banks were facing withdrawals, that Greece is hoping to bypass any IMF contribution to the rescue plan because of the onerous austerity conditions that will be attached, and that Greece is planning to launch a $5 billion to $10 billion bond aimed at U.S. investors because other investors are shying away from Greek paper.

All this helped to swamp the better outlook for the global economy, encouraged by rising commodity prices, a strong non-manufacturing ISM from the U.S. and news that the Reserve Bank of Australia had raised interest rates again.

The euro fell to $1.3437 from $1.3484 and to Y126.27 from, Y127.12 while the dollar declined to Y93.97 from Y94.31.