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Dollar gains as world leaders seek coordinated response

By Paul McBeth

Monday 13th October 2008

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The New Zealand dollar gained as world leaders in Europe, the US and Asia agreed to coordinated measures to stem the impact of the financial crisis that has sent stock markets plunging.

The New Zealand dollar rose to 60.25 US cents from 59.41 cents on Friday in New York. The currency has tumbled about 26% from its high in March. It gained to 60.71 yen from 59.79. Against the Australian dollar, it fell to 90.25 cents from 92.32 cents.

Prime Minister Helen Clark yesterday announced a scheme to guarantee all savers’ deposits for the next two years, taking on up to NZ$150 billion in liabilities. Australia will introduce a similar scheme. European leaders and the G-7 nations vowed to increase efforts to prevent more bank failures over the weekend. Investors will get their first inkling how equity markets will respond when trading begins in the Asia-Pacific region today.

“All eyes are on the market,” said Khoon Goh, senior markets economist at ANZ National Bank. “The big driver is in offshore equities.”

New Zealand’s benchmark NZX 50 Index fell 4.6% to a four-year low 2809.45 on Friday, amid concern the global rout will lead to a worldwide recession and more corporate failures. The Dow Jones Industrial Average fell 1.5% to 8451.19 and Germany’s DAX 30 dropped 7% to 4544.31. The Standard & Poor’s 500 Index fell 1.2% to 899.22, rounding out its worst week in 75 years.

Prime Minister Clark said the deposit guarantee scheme is aimed at preventing the global crisis from leading to a “depression in New Zealand, with widespread unemployment”. The scheme intends to avoid a slew of panic withdrawals and will cover credit unions, building societies, finance companies that take deposits, and cash portfolio investment entities sponsored by covered institutions as well as traditional trading banks.

The Group of Seven nations met over the weekend and stressed the need for coordinated action to stabilise the financial markets. They released a five point plan stating their general direction to address the situation, and will take all necessary steps to stem the crisis. Goh said the statement “might calm some nerves.”

The International Monetary Fund endorsed the G7 stance, and issued another warning that the financial system was near meltdown and could plunge global equities by a further 20%.

ASB Bank Limited advises its intention to immediately opt into the New Zealand Deposit Guarantee Scheme.

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