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NZ dollar little changed before rescue vote

By Paul McBeth

Thursday 2nd October 2008

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The New Zealand dollar was little changed ahead of votes by US lawmakers on the US$700 billion rescue package and is seen declining by year end as interest rates fall.

The US upper house expects to approve the revised proposal when it votes today, and urged the Congress to ratify their vote when it is sent back to the House on Friday. The package is tipped to deliver much-needed certainty to global economies reeling from the credit crisis.

“The dollar’s in a holding pattern, driven by offshore events, particularly the bailout in the US - local data is second fiddle,” said Khoon Goh, senior economist at ANZ National Bank. “Global stability will see the focus return to real economies.”

The New Zealand dollar rose to 67.22 US cents from 66.85 cents yesterday. This week it has ranged between 68.75 cents and 66.69 cents as markets worldwide clawed back from a rout sparked by the Congress’s initial rejection of the rescue plan.

Goh said the US bailout package is needed to give the global economy some stability and stem the “huge flight to safety” as investors eschew riskier assets. If lawmakers in the US are unable to secure the rescue package, the slump in equity markets on Monday “could be a taste of what’s to come,” he said.

Should a rescue plan be approved, soothing fears in global markets, the kiwi will probably resume its decline as investors focus on local economic issues, he said.

Investors will get a snapshot of the New Zealand economy next Monday, when the government opens its books in the Pre-election Fiscal and Economic Update. That’s likely to show the first budget deficit since 1993, reflecting an economy in recession, Goh said.

The central bank is expected to cut the official cash rate 50 basis points to 7% when it review monetary policy on Oct. 23, according to many economists.

“We expect there will be huge swings throughout next year, but overall, the trend will be going down,” Goh said. He sees the New Zealand dollar falling to 65 US cents by the end of the year and to 60 cents in the first half of 2009.

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