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Dollar falls as record interest rate cut predicted

By Paul McBeth

Monday 1st December 2008

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The New Zealand dollar fell, snapping a four-day advance, as further signs of weaker world growth stoked speculation the central bank will cut the official cash rate (OCR) by as much as 150 basis points this week.

The dollar gained 1% last week as rising global stocks encouraged investment in higher-yielding, or riskier assets. More economists are predicting Governor Alan Bollard will lower the OCR to as little as 5% to buffer the economy from a deepening recession. The Reserve Bank of Australia will review its benchmark rate tomorrow, and may cut the rate by 75 basis points, economists say.

“This week, given the chance of a large rate cut, the dollar will come under pressure,” said Khoon Goh, senior markets economist at ANZ. “Taking the more aggressive action of a 150 point cut is more likely.”

The kiwi fell to 54.84 US cents from 55.24 on Friday, and dropped to 52.42 yen from 52.64 yen on Friday. It fell to 65.34 Australian cents from 65.90 cents.

Goh said the dollar will probably trade between 54.50 US cents and 55.50 cents today.

New Zealand exporters are calling on Bollard to make an even more aggressive cut of 200 basis points. "New Zealand still has one of the highest interest rates in the world and this must change if we are to have a hope of addressing our debt mountain," said New Zealand Manufacturers’ and Exporters’ Association chief executive John Walley.

Deeper rate cuts are predicted as central banks in Europe review their benchmark rates this week. The Bank of England is expected to cuts it benchmark rate by a further 100 basis points to 2%, and economists agree the European Central Bank will cut rates by 50 basis points cut to 2.75%.

Giving the Australian central bank scope for a bigger-than-expected cut is its reduced forecast for 2008 economic growth to 1.5% from 2%. Australia’s government yesterday announced a A$15.1 billion spending package if growth slows more than expected.

In another sign of a weakening US economy, a median estimate of economists surveyed by Bloomberg News is predicting the biggest one-month fall in employment since the terrorist attacks in 2001. The Labor Department will release its unemployment figures later this week in what may be the highest jobless rate since 1993 of 6.8%.

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