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NZ dollar extends slide as Europe debt crisis overshadows local Budget

Friday 21st May 2010

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The New Zealand dollar extended its slide as the European debt crisis continued to be at the foremost of investors’ minds, overshadowing an upbeat government Budget showing a strong fiscal position.

Stocks on Wall Street and in Europe tumbled as the threat of contagion from the Euro-zone’s most indebted nations weighs on investors’ appetite for higher yields.

Federal Reserve Governor Daniel Tarullo told American policymakers Europe’s sovereign debt crisis posed a threat to the US and could cause a “serious setback” to the global recovery.

The fears overshadowed the local Budget, which showed New Zealand’s economy was on track to recover with cuts to the corporate and personal tax rates, along with an improved fiscal position.  

The good news of the Budget “was completely swamped by whatever’s going on in the Euro-zone contagion,” said Imre Speizer, markets strategist at Westpac Banking Corp.

“The Budget was more positive for local fundamentals, but against global influences, economic fundamentals count for jack.” 

The kiwi extended its slide to 66.42 US cents from 67.50 cents yesterday, and dropped to 64.54 on the trade-weighted index of major trading partners’ currencies from 65.76 yesterday.

It declined to 59.37 yen from 61.69 yen yesterday, and slipped to 81.21 Australian cents from 81.28 cents. It decreased to 53.19 euro cents from 54.56 cents yesterday, and sank to 46.28 pence from 47.05 pence.  

Speizer said the currency may trade between 66 US cents and 68.50 cents today, with the sharp volatility making big moves possible.

The major threat to Australia and New Zealand from Europe’s debt crisis would be increased costs of funding, and there are tentative signs that these expenses are creeping up for trans-Tasman banks, he said.  

The kiwi dollar will continue to perform well against its Australian counterpart with New Zealand’s closest neighbour under pressure on several fronts, Speizer said.

The close link between Australia and China has the Australian currency under pressure as the world’s third largest economy looks to start cooling, while the proposed super-tax on mining is sapping investors’ appetite for the so-called ‘lucky country’s’ raw materials.  

Of the commodity currencies, the Canadian dollar has picked up support among traders, who are betting the North American nation will pick up any slack in Australian mining. The kiwi dollar edged up to 71.37 Canadian cents from 712.20 cents yesterday.

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