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Dollar slips as China signals move to normal monetary policy setting

Wednesday 13th January 2010

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The New Zealand dollar slipped below 74 U.S. cents after the Chinese central bank signalled an early move towards a more normal monetary policy setting.

The People's Bank of China boosted banks' reserve requirements 50 basis points, the first change since December 2008, and ANZ National's Chinese economist predicts it will be raised a further three times this year to the 6% to 7% after Chinese New Year on February 14.

The move put pressure on so-called commodity currencies such as the Australian, New Zealand and Canadian dollars, which have benefited from strong demand for raw materials in the world's third largest economy.

The Reuters/Jeffries CRB Index, which tracks 19 raw materials, fell 2% to 283.63.  

"A change in China's reserve requirements earlier than expected may be a sign that they're trying to tighten up monetary policy and cool the economy down quicker than expected," said Chris Tennent-Brown, economist at Commonwealth Bank of Australia.

"Risk aversion was the dominant theme with shares down, commodity prices off and the New Zealand dollar weaker as well."  

The kiwi slipped to 73.85 U.S. cents from 74 cents yesterday, and dropped to 66.75 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 66.91.

It sank to 67.12 yen from 68.01 yen yesterday, and advanced to 80.25 Australian cents from 79.86 cents. It declined to 50.93 euro cents from 51.09 cents yesterday, and decreased to 45.66 pence from 45.95 pence.  

Tennent-Brown said the currency may trade between 73.60 U.S. cents and 74 cents today, and will probably stay in the "high 73s, low 74s over the next couple of days." 

Helping boost risk aversion was a disappointing start to the fourth-quarter earnings season in the U.S., with aluminium producer Alcoa Inc. falling short of expectations, and Chevron Corp. warnings its results will be "sharply lower" than last year.

The Volatility Index, commonly known as Wall's Street's ‘fear gauge', climbed 7.5% to 18.86.  

Investors will get an update on how prices for raw materials produced in New Zealand are performing when the ANZ Commodity Price Index comes out this afternoon.

The series has been propped up by surging dairy prices over the past year, and the December survey won't catch the small decline registered in Fonterra Cooperative Group's online trading platform earlier this month.

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