NZ dollar drops after RBNZ looks at new home loan restrictions

The New Zealand dollar dropped after the Reserve Bank said it's looking at ways to restrict lending on residential property investments, stoking speculation it would then have more room to cut interest rates.

The kiwi fell to 75.52 US cents at 5pm in Wellington from 75.88 cents immediately before the release, to be little changed from 75.55 cents yesterday. The trade-weighted index was at 78.67 from 78.56.

The Reserve Bank is seeking feedback on a proposal to lift banks' capital requirements for lending on residential property investment, which it sees as riskier than loans to owner-occupiers. The RBNZ says the new rules would make it easier to introduce targeted macro-prudential tools, though none were planned. Investors saw the step as making it easier for the Reserve Bank to cut interest rates if it has other means to deal with the property market without making the kiwi more attractive.

"If they can find some other method to slow down the property market, it makes it easier for them to cut rates," said Michael Johnston, senior trader at HiFX in Auckland. "I don't think the kiwi's going to have a big downside correction - it's had it's little flurry and that will be it for the moment."

The kiwi climbed to 68.22 euro cents from 67.61 cents yesterday ahead of the European Central Bank policy meeting, where Europe's monetary authority is expected to outline plans to embark on a quantitative easing programme.

After the ECB meeting, investors will be looking at US employment figures on Friday in Washington for their cue on the direction of the greenback.

The kiwi fell to 4.7325 Chinese yuan from 4.7382 yuan yesterday after policymakers in the world's second biggest economy set an annual economic growth target of 7 percent, the lowest in 15 years.

The local currency was little changed at 96.56 Australian cents from 96.59 cents yesterday after Australian government figures showed retail grew 0.4 percent in January, the strongest pace in three months. Data yesterday showed robust household consumption offset the nation's declining resources sector.

The kiwi traded at 90.45 yen from 90.37 yen yesterday, and increased to 49.51 British pence from 49.19 pence.

New Zealand's two-year swap rate fell to 3.55 at 5pm in Wellington from 3.575 yesterday, and the 10-year swap rate decreased to 3.815 from 3.825.