SINGAPORE: The Australian dollar fell to multi-year lows on Wednesday (7 August) as investors bet the country's central bank will follow the New Zealand move with massive interest rate cuts.
The Australian dollar fell to 0.9246 against the Singapore dollar, a level that has not been observed since October 24, 2008, when it touched 0.9158, according to global financial portal investing.com.
The Australian dollar has slid above 3% from its Singaporean counterpart since the year, according to Bloomberg.
The fall came after the Reserve Bank of New Zealand (RBNZ) lowered its benchmark interest rate to its lowest level of 1% as it forecasts tighter economic conditions ahead.
The half percent reduction was surprising, with most economists predicting a 0.25 percent decline.
Most indicators showed that the economy remained relatively dynamic, but the bank said it had concerns about global trade.
"It was a stunning decision," said New Zealand Westpac Chief Economist Dominique Stevens, noting that percentages were down 50 basis points or more in just three other cases.
"RBNZ seems to be trying to get ahead of the curve," he added. "Given our apparent willingness to cut rates and our view that there is some additional economic softness in the near future, we now expect another 25 basis points to be reduced in November."
UOB economist Lee Sue Ann said: "We thought RBNZ would prefer more time to evaluate the impact of the first rate decrease in May and wait for further development of the economic front.
"In general, we see that today's higher-than-expected move is preventative in nature and RBNZ will probably wait for it before reconsidering further interest rates reductions."
The New Zealand dollar fell 2% to $ 0.6378 in news – a level not observed since early 2016 and the largest one-day decline since late March.
Kiwi winding has dragged its cousin down as RBNZ's large rate cut puts pressure on the Reserve Bank of Australia (RBA) to move again after reducing its benchmark rate to 1 per cent in July.
As a result, the Aussie dollar jumped 1.1 percent to $ 0.6677, a level not observed since early 2009.
The move in New Zealand highlights how worried politicians have become about the expanding impact of trade friction.
The New Zealand economy relies on a country that sells agricultural commodities overseas, in particular milk powder in China, and tourism.
"We have already kept up with all US tariffs on China, but now people are starting to wonder if we are heading for any global recession," said Kiyoshi Ishigane, general manager of funds at Mitsubishi UFJ Kokusai Asset Management.