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NZ dollar sinks to four-week low as risk appetite fades amid Korean crisis

Wednesday 24th November 2010

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The New Zealand dollar dropped to a four-week low as investors shunned riskier, or higher-yielding, assets amid heightening tensions between North and South Korea.  

Equity markets and commodity prices tumbled worldwide as investors returned to the relative safety of American and Japanese bonds after the fiercest skirmish between North and South Korea that killed two South Koreans and wounded another 17. The Dollar Index, a measure of the greenback against a basket of six currencies, climbed 0.9% to 79.64 as investors sought out so-called safe havens.

"Risk appetite was scuppered as news broke of the North & South exchanging artillery fire, immediately impacting regional currencies and equity indices," said Mike Jones, currency strategist at Bank of New Zealand. "The markets were already pressured by concerns that Ireland may not have the political will and ability to see through any rescue agreement."

The kiwi sank to 76.11 US cents from 76.95 cents yesterday and dropped to 68.70 on the trade-weighted index of major trading partners’ currencies from 69.12. It fell to 63.19 yen from 64.36 yen yesterday, and declined to 78.16 Australian cents from 78.38 cents. It rose to 56.82 euro cents from 56.74 cents yesterday, and slipped to 48.19 pence from 48.32 pence.

Tim Kelleher, head of institutional FX sales New Zealand at ASB Institutional, said the currency may trade between 75.75 US cents and 76.25 cents today with a bias to the downside, though any moves lower will probably come during the London and New York trading sessions.

The Federal Reserve released the minutes from its last meeting where members voted to print US$600 billion to buy loans and mortgage-backed securities in a bid to stoke a stalled recovery. Though the minutes didn't flag any new material, they showed the Federal Open Market Committee discussed the weaker greenback and that Chinese authorities let the renminbi appreciate slightly. They also acknowledged the second round of asset purchasing could further devalue the US currency.

US data was stronger than expected, with the second estimate of America’s third-quarter gross domestic product raised to 2.5%.

Markets are expected to quieten down over the next couple of days as America closes for Thanksgiving holiday on Thursday.

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