By Chiara Albanese
The New Zealand dollar lost value against the U.S. dollar on Monday after China halted imports of milk products from the world's largest dairy exporter.
In Asian trading, the New Zealand dollar, known in the foreign exchange market as the "kiwi," weakened almost 2% after the New Zealand government said China would temporarily suspend shipments from Fonterra Co-Operative Group Ltd. FCG.NZ -3.08% (FCG.NZ) containing whey protein or milk powder. Fonterra on Saturday said some of its products used in infant formula or sports drinks were contaminated with a bacteria that could cause potentially fatal food poisoning.
The kiwi later pared almost all its losses and was trading at $0.7781 compared to $0.7833 before the announcement.
The sharp move underscored New Zealand's dependence on its dairy industry. Fonterra is not only New Zealand's biggest dairy producer. It is also the world's largest dairy exporter.
"Dairy is to New Zealand as iron ore is to Australia," said Gareth Berry, a currencies strategist at UBS. "The two commodities top the respective export baskets in either country. Consequences could be quite severe for the New Zealand dollar unless the ban is lifted within a week or two."
In the past year, New Zealand exported NZ$11.47 billion of dairy products. This accounts for a quarter of all exports and 5.7% of the country's gross domestic product, according to UBS. China is New Zealand's largest trading partner.
Over the longer term, the kiwi is facing headwinds from rising interest rates, especially in the U.S., which could make it harder for New Zealanders to finance high levels of private debt and pension and insurance plans.
"Authorities are already working intensely to find a solution to the dairy ban," said Hans Redeker, a currencies strategist at Morgan Stanley. "But in the greater context, the (New Zealand) dollar remains vulnerable to the need of the country to finance its liabilities."
The buck was weaker against major currencies on Monday, after non-farm payrolls on Friday showed that the U.S. added fewer jobs than expected in July. As a result, the Federal Reserve may delay scaling back its $85 billion-a-month bond-buying program.
In the U.K., a reading of the services sector showed rapid improvement in the third quarter. The monthly services purchasing managers index for the U.K. rose from 56.9 in June to 60.2 in July, the highest level since December 2006.
The pound immediately strengthened, trading at $1.5361, a one-week high for the currency. That could be short-lived, if, as investors expect, the Bank of England introduces a form of guidance on its future rates decisions on Wednesday.
"We expect the Monetary Policy Committee to introduce forward guidance, committing not to tighten via quantitative easing or the bank rate at least until the jobless rate hits a specified threshold and so long as the inflation forecast remains below 2.5%," said Valentin Marinov, a currencies strategist at Citigroup.
Comparable U.S. service figures due later Monday are also expected to show a pickup in activity.
At 1000 GMT, the euro was trading at $1.3279 against the dollar, compared with $1.3207 late Friday in New York, according to trading system EBS.
The dollar was at ¥98.34 against the yen, compared with ¥98.94, while the euro was at ¥130.59 compared with ¥131.35. The pound was trading at $1.5362 against the dollar, compared with $1.5291 late Friday in New York.
The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, was trading at 74.230, compared with 74.391 late Friday in New York.
