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Dollar may rise as uridashi sales show demand for yield

By Paul McBeth

Tuesday 18th November 2008

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The New Zealand dollar may gain this week as pending uridashi bond sales show there's still demand for New Zealand's relatively high interest rates.

New Zealand's interest rate cuts mirror reductions by the world's major central banks, ensuring there's still an appetite for bonds denominated in the local currency, according to Tim Kelleher, corporate risk manager at ASB Bank. Governor Alan Bollard is expected to cut the official cash rate by 100 basis points next month to 5.5%, according to the consensus of economists' forecasts. The Bank of Japan last month cut its target rate to 0.3%.

The prospect of further bond sales in kiwi dollars is ensuring the currency "is a little more comfortable in general," Kelleher said. Some "$534 million is to be bought over the next week" via uridashis, he said.

The kiwi fell to 55.81 US cents from 55.95 yesterday and dropped to 54.15 yen from 54.41. It slid to 84.93 Australian cents from 85.50 cents, and was down to 43.86 euro cents from 44.11 cents yesterday.

Kelleher said the kiwi may trade between 54.50 US cents and 60.50 cents this week. Even with the uridashi issue, he said the broader trend for the local currency is to weaken.

In another signal of the New Zealand economy's weakness, figures for producer prices due out today are expected to show the pace of increases for both inputs and outputs is slowing. New Zealand slid into a recession earlier this year, its first since 1998 and Goldman Sachs JBWere economist Shamubeel Eaqub predicts the contraction will extend into 2009 as job losses mount.

As the global crisis widens, Japan's economy, the world's second largest, entered its first recession since 2001, figures yesterday showed, with forecasters predicting conditions may get even worse.

In the US, stocks extended their two-week decline as a record contraction in New York manufacturing and Citigroup Inc.'s proposal to cut 50,000 jobs sparked fears that its looming recession may be deeper than first thought.

The global outlook is still gloomy, said Danica Hampton, currency strategist at Bank of New Zealand. "Positive economic and credit news is still lacking," she said.

With currencies being driven by global growth, Hampton expects continued support for the US dollar and yen, limiting rallies in the New Zealand dollar.

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