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Dollar gains amid efforts to shore up global financial system

By Paul McBeth

Tuesday 14th October 2008

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The New Zealand dollar rose as governments in Europe and the US stepped up efforts to prop up the financial system, helping stocks rally and boosting demand for higher yielding assets.

The European Union coordinated pledges of some 1.3 trillion euros to guarantee banks and take stakes in lenders, while the Federal Reserve backed European efforts to flood the market with dollars. The Standard & Poor’s 500 index staged its biggest surged since 1987 and Germany’s DAX 30 jumped 11%.

“It’s a sigh of relief” that efforts are being made to restore confidence, said Tim Kelleher, corporate risk manager at ASB. The kiwi dollar was “oversold” last week, as stock markets tumbled, he said.

The kiwi rose to 61.44 US cents from 60.31 cents yesterday, and jumped to 62.44 yen from 60.70.

The Australian and New Zealand governments’ deposit guarantee schemes have also helped underpin confidence in the nations’ currencies. “The Australian guarantee includes wholesale deposits” making it more attractive than New Zealand for investors, said Kelleher.

The New Zealand dollar fell to 88.22 Australian cents from 89.78.

Kelleher said the kiwi is over-valued against the Australian, and will probably continue down into the mid-80 cents.

To be sure, New Zealand’s economy is still mired in recession, which economists say will spur the central bank to cut the official cash rate as much as 100 basis points to 6.5% on October 23. It may continue cutting the rate to as low as 4.75%, according to economists at ANZ Bank.

A survey yesterday showed New Zealand consumers grew more pessimistic about the economic outlook this month, amid signs of a widening global slowdown that will erode demand for the nation's exports.

Some 51% of respondents expect the economy to deteriorate over the next 12 months, and 47% say they're worse off financially than they were a year ago, according to the Roy Morgan survey.

Economists such as Shamubeel Eaqub at Goldman Sachs JBWere say New Zealand is yet to feel the second-round effects of recession, including job losses and a rising unemployment rate.

Kelleher said the New Zealand dollar may gain this week to toward 63-to-64 US cents. He predicts the New Zealand dollar will trade between 60.80 and 62.00 US cents today.

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