Dollar falls as Euro banking woes stoke risk aversion

Tuesday 20th January 2009

The New Zealand dollar declined after Royal Bank of Scotland said it was heading for a record loss for a UK company, stoking concern about the global banking industry and spurring investors to avoid higher yielding, or riskier assets.

Shares of Royal Bank of Scotland tumbled 67% after the lender said its annual loss may be as much as 28 billion pounds this year, leading a slide in European banking companies on the Dow Jones Stoxx 600 Index yesterday. US markets were closed for the Martin Luther King Day holiday.

Fuelling fears about the global economy, Standard & Poor's cut Spain's credit rating one level to AA+ and the European Commission said the euro-zone economy will shrink 1.9% this year, the first contraction since the euro currency was introduced.

The kiwi dollar also declined ahead of figures today expected to show inflation is dissipating with the slide in oil prices and a prolonged recession, giving the central bank more room to cut interest rates on January 29.

"Renewed fears about the banking sector saw most currencies skid lower as investors fled for the relative safety" of the US dollar and yen, said Danica Hampton, currency strategist at Bank of New Zealand. The kiwi "was no exception."

Reduced inflation pressures "should allow the RBNZ to cut rates aggressively at its next meeting," she said.

Relatively high interest rates have helped underpin the New Zealand dollar. The currency fell to 54.29 US cents today from 54.99 cents and dropped to 49.18 yen from 50.04. The kiwi gained to 41.37 euro cents from 41.22 and was little changed at 81.27 Australian cents.

The consumer price index probably fell 0.4% in the final three months of 2008, swinging from an 18-year high of 5.1% in the third quarter, according to a Reuters survey. The central bank is expected to slash the official cash rate by 100 basis points to 4% this month.

Government figures this week may show retail sales fell 0.9% in November from the previous month, according to the median estimate in a Reuters survey. Excluding autos, sales growth probably stalled after climbing 0.8% in the previous month.

By Jonathan Underhill

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