Reserve Bank of New Zealand Raises Interest Rates Due to 'Unsustainable' Kiwi

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The New Zealand dollar fell to its six-week low against the U.S. dollar after the Reserve Bank governor, Graeme Wheeler, said the strength of the Kiwi was "unjustified." This paved the way for the Reserve Bank of New Zealand to intervene in the currency exchange market.

The Kiwi dropped to as low as 86.05 U.S. cents before the Reserve Bank released its statement. The dollar went as high as 87.02 cents before dropping to its recent exchange at 86.21 cents.

The Reserve Bank of New Zealand had raised interest rates to 3.5 per cent to slow down inflation due to a growing economy. The ongoing construction work in quake-damaged Christchurch has boosted New Zealand's economy growth to its fastest rate in six years.

Reports cited New Zealand's growth rate is the strongest compared to most developed nations which includes Australia, Europe and the U.S. The high growth rate has prompted the Reserve Bank of New Zealand to increase interest rates four times within the year to reach its current rate of 3.5 per cent.

According to the Wall Street Journal, New Zealand's economy has been outperforming most major economies in the world due to the rising demand of its meat and dairy exports in Asia. The country's economic expansion is being driven by favourable financial conditions, resurging construction activity, high commodity prices and sufficient increase in immigration.

New Zealand's booming economy has attracted more migrants to the country. It also gave citizens overseas reason to return home. As a result, the country is currently experiencing its strongest influx of immigrants in more than 10 years. New Zealand's annual migration is seen to go beyond 40,000 as more people choose to stay in the country. 

According to reports, the "unjustified" Kiwi is one of the criteria used by the Reserve Bank to determine its decision to intervene in the market. The policy is also based on a range of economic data.

Westpac Banking Corp. senior market strategist Imre Speizer said the New Zealand dollar may still be on a downward trend with a rate below 86 U.S. cents and move towards 85.50 cents in the coming days. He said the exchange rate has yet to adjust to weak commodities, making the Kiwi unsustainable and unjustified.

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