Kiwi dollar tumbles on hefty 50-point rate cut

London

NEW ZEALAND'S dollar fell heavily on Wednesday after its central bank stunned markets with an aggressive interest rate cut and said negative rates were possible, fuelling bets on more global easing.

Meanwhile, the euro fell slightly against the US dollar to US$1.1185, with poor industrial output data in Germany weighing on the single currency.

While central banks have turned increasingly dovish in recent months as they try to revive growth and fight low inflation rates, the extent of the Reserve Bank of New Zealand's (RBNZ) move caught markets off guard.

The Kiwi currency plunged to its lowest level since early 2016.

"It seems the RBNZ feels the need to get to the lower bound as quickly as possible. That will encourage thoughts that other central banks, such as the ECB (European Central Bank), will not hang around when they next meet," ING analysts said.

The RBNZ slashed rates by 50 basis points against an expected 25 basis points to 1 per cent, and governor Adrian Orr said negative rates were possible.

The New Zealand dollar was last down 1.3 per cent at US$0.6435 , having earlier hit US$0.6378.

The Aussie fell 0.3 per cent to US$0.6735 as markets ramped up their bets that Australia would also cut rates faster and deeper than previously expected. Earlier, the Australian dollar dropped 1.1 per cent to US$0.6677, a level not seen since early 2009.

Analysts said such large moves in two of the traditionally higher-yielding major currencies had jolted forex markets, and encouraged a move into the perceived safety of the yen.

The Japanese currency rose 0.2 per cent to 106.27, although that was still some way from levels seen on Monday when the escalating US-China trade war panicked investors.

Against the yen, the kiwi dropped 2.3 per cent, at one point falling to the lowest since late 2012, while the Aussie hit 70.74 yen, the lowest since April 2009.

Against a basket of currencies the US dollar rose slightly to 97.702.

The Chinese yuan fell again, dropping 0.3 per cent to 7.074 in offshore markets, although it was above Monday's lows when Beijing shocked markets by allowing the currency to fall through the key level of seven yuan per dollar.

Concerns are growing because the world's two largest economies are locked in a bitter trade dispute that rapidly escalated last week when US President Donald Trump said he would impose more tariffs on Chinese goods.

China responded on Monday by allowing its currency to weaken past the psychologically important line of seven yuan per US dollar, which immediately prompted Washington to label Beijing a currency manipulator. REUTERS