The New Zealand dollar dropped on Thursday after the International Monetary Fund said it was overvalued by between 10% and 25%.
The N.Z. Dollar staged a sharp fall against major opponents shortly after the IMF report, and was quoted at 1.2953 against the Australian dollar, 0.7077 versus the U.S. dollar, 66.18 against the yen and 1.9115 against the euro.
"While there is uncertainty, our estimates suggest the currency is presently overvalued by 10-25%," the IMF said.
"Part of this overvaluation may be temporary and the exchange rate may depreciate as the interest rate differential narrows with eventual tightening by the U.S. Federal Reserve," it added.
The IMF also urged New Zealand's government to slash spending further to swing its budget deficit to a surplus sooner.
"We advise further spending restraint to return to surpluses earlier than planned," it said.
Faster consolidation over the next 3-4 years would take the pressure off monetary policy and the exchange rate, thereby helping rebalance the economy toward the tradables sector and contain the current account deficit, the lender said.
Finance Minister Bill English said the IMF report backed the "considered and pragmatic" approach taken by the government to addressing New Zealand's economic challenges.
"At the same time, we're significantly reducing the amount of extra government spending and demanding better public services from government agencies. We believe we have struck the right balance on this score," he said in a statement.
English added that the Budget on May 20 will set out the next steps in the government's plans to bolster the country's economic growth.
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