Of the world’s 16 major currencies, the New Zealand Dollar (NZD) has been the best performer over the last couple months, having appreciated 10% since July. The strength of the Kiwi has baffled central bankers, who have been unable to connect the currency’s rise to any economic or technical indicators. Their only explanation is that hedge funds have piled into the Kiwi, in search of an attractive, relatively stable return. Hedge funds would use the carry trade technique to short low-yielding currencies and use the proceeds to purchase New Zealand short-term debt, which is currently yielding 7.25%. However, the Central Bank urges caution, insisting that the Kiwi could suffer a collapse at any moment. Bloomberg News reports:

“The assumption certainly of the Reserve Bank and which I share is that the medium-term trend in the New Zealand dollar is down.”

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