NZ dollar drops vs. greenback, gains vs. Aussie after RBA cuts key rate to 2.25%

The New Zealand dollar fell to a four-year low against the greenback and gained against the Australian dollar after the Reserve Bank of Australia cuts its key interest rate to a record low 2.25 percent, citing tame inflation and weak domestic demand.

The kiwi fell to 72.21 US cents at 5:30pm in Wellington, from 72.63 cents yesterday, tracking the Australian dollar, which dropped to its lowest in almost six years. The kiwi climbed to 94.19 Australian cents from 93.40 cents yesterday.

Traders had priced in about a 60 percent probability of a rate cut by the RBA today, following Australian inflation data last month that showed consumer prices rose just 0.1 percent in January from December for an annual pace of 1.5 percent, matching a low reached in July 2012. The kiwi dollar may extend its own decline on speculation the impact of dry weather on agricultural output and weak inflation will give the Reserve Bank of New Zealand room to cut interest rates.

Imre Speizer, strategist at Westpac Banking Corp, said drought typically has a lagged effect, reducing feed over winter and prompting farmers to cull stock, which could contribute to weaker economic growth.

"There's now a case for it (a rate cut)," Speizer said, adding that a cut wasn't Westpac's core view. With weak inflation and drought afflicted farmers, it would only take some development in geopolitics, such as another crisis in Greece, "and you've got the makings of a case for a rate cut."

RBNZ governor Graeme Wheeler is due to speak tomorrow to the Canterbury Employers Chamber of Commerce in Christchurch and could use the speech to reflect on monetary policy and the response to last week's statement. Ahead of Wheeler's speech, the GlobalDairyTrade auction overnight will show whether the price of dairy products, New Zealand's biggest export, have found a base.

The New Zealand dollar declined to 63.58 euro cents from 64.21 cents yesterday and fell to 47.92 British pence from 48.15 pence. It fell to 84.33 yen from 85.57 yen.

The trade-weighted index dropped to 75.02 from 75.55 yesterday.