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Dollar jumps after Fed Reserve cuts rate more than expected

By Paul McBeth

Wednesday 17th December 2008

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The New Zealand dollar jumped after the US Federal Reserve cut interest rates to a record-low range of zero and 0.25%, and stated it will use any means available to end the recession.

The Federal Open Market Committee said in a statement it "will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability." The US dollar extended its losses for the fifth day as investors sought higher-yielding assets. US stocks jumped as the cost of borrowing in the US got cheaper, with the Dow Jones Industrial Average up 2.8% and the Standard & Poor's 500 rising 3.1%. New Zealand's official cash rate is sitting at 5%, having tumbled 300 basis points since September.

"With no yield benefit gained from the US dollar, the kiwi will look favourable," said Philip Borkin, economist at ANZ National Bank. "The next few days could be good for the kiwi."

The New Zealand dollar jumped to 57.23 US cents following the Fed announcement. It earlier rose to 56.46 cents from 55.66 cents yesterday. It increased to 53.40 yen from 50.342 yen yesterday, and was up to 40.93 euro cents from 40.76 cents. It fell to 83.40 Australian cents from 83.42 cents yesterday.

Borkin said the "Bank of Japan is concerned" about the ongoing strength of the yen as the country's economy falls deeper into recession. The yen fell 89.23 per US dollar after the Fed's announcement.

In New Zealand, the government releases its budget policy statement tomorrow, which is expected to show the country's accounts to be in worse shape than previously expected. Treasury secretary John Whitehead told a business conference earlier this week that although New Zealand faced tough economic times ahead, he was "incredibly positive about New Zealand's prospects."

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