The New Zealand dollar tumbled from a 22-year high versus the US dollar on Monday after selling by the Reserve Bank of New Zealand raised concerns about how much longer carry trades would continue.
The dollar was little changed against the euro and the yen, holding onto gains versus the euro after hitting a two-month high late last week when the benchmark US Treasury yield jumped to its highest level in around five years. The New Zealand currency fell 1.5 percent against the US dollar.
RBNZ Governor Alan Bollard confirmed the intervention, adding that the central bank regarded current levels as "exceptional and unjustified in terms of economic fundamentals." Analysts said that market participants may consider the New Zealand currency's losses as a sign that the carry trade, in which investors use low-yielding currencies such as the yen to pick up assets in high-yielding ones, may have gone too far.
"It may impact other high-yielding currencies by unnerving investors conducting carry trade who have become wary of rising interest rates world-wide," said Koji Fukaya, senior currency strategist at Deutsche Bank. He added that an unwinding of such positions may prompt short covering in the yen, which in the past few years has been the biggest loser in the carry trade.
RBNZ selling helped to drive the New Zealand dollar down to US $0.7527, down from US $0.7638 in late US trading on Friday. The New Zealand dollar fell as low as US $0.7512 this session, sharply lower than $0.7640 hit late last week for the first time in 22 years since the central bank floated the currency. It dropped around 1.5 percent to 91.55 yen dropping from a 17-year high just below 93 yen hit on Friday.
The Australian dollar slipped in sympathy with its New Zealand counterpart, falling roughly half a percent against the US dollar and the yen. Australian markets were closed for a national holiday on Monday.
The euro edged down 0.16 percent to $1.3351 closing in on a two-month low around $1.3320 touched on Friday and fell 0.2 percent against the yen to 162.41 yen. Traders brushed off revised data on Monday that showed Japan's economy expanded by 0.8 percent in January-March from the previous quarter, as expected, up from an initial estimate of 0.6 percent.
The US dollar and the euro dipped against the yen, but the moves were mild compared to the New Zealand dollar's steep fall. Gains in Japanese and Chinese shares helped to temper concerns of a broad reversal in yen carry trades, which involve the selling of the low-yielding Japanese currency to invest in higher-yielding currencies and assets, market players said.
Japan's Nikkei share average rose 0.22 percent and China's benchmark stock index gained 1.22 percent. "I don't think there will be a direct impact on investor risk appetite just from what happened with the New Zealand dollar," said Tomoko Fujii, head of economics and strategy in Japan for Bank of America.
"The situation seems alright but if equities fall more than investors can bear, there would be a risk of a steeper- than-expected reversal of yen carry trades," Fujii said, adding that Chinese shares would remain closely watched as a gauge of risk appetite.
The dollar steadied around 121.65 yen. On Friday, it climbed to around 121.85 yen, boosted by a surge in the 10-year Treasury yield to 5.25 percent - near a five-year high and matching the Federal Reserve's official funds rate. Against a basket of currencies, the dollar was at 82.711 after rising as high as 82.919 on Friday, hitting the highest level since early April.