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Dollar hits six-year low vs. yen as investors fly to safety

By Paul McBeth

Friday 24th October 2008

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The New Zealand dollar fell to a six-year low against the yen as investors exited higher yielding, or riskier assets funded with Japan’s currency amid signs the credit contagion is spreading to emerging economies.

Standard & Poor’s lowered Russia’s credit rating outlook due to the rising costs of its banking rescue package, while Argentina has taken emergency measures to stabilise its economy by nationalising its pension assets to repay debt. The Bank of New Zealand’s risk appetite index dropped to its lowest level since October 2002.

“Risk aversion and worries about a global recession remained the order of the day,” said Danica Hampton, currency strategist at the Bank of New Zealand. “These flows are expected to continue benefiting the US dollar and yen over the coming months.”

The kiwi fell as low as 55.66 yen, and recently traded at 56.07, down from 57.93. It dropped to 58.13 US cents from 59.21 yesterday, falling as low as 57.96 cents. The US dollar fell to 96.32 yen from 97.74.

The yen strengthened against other major currencies, reaching 123.43, its highest level against the euro since December 2002. Barclays Capital said in a research note that the yen may rise to 90 per US dollar by March 2009 as investors dump their higher-yielding assets funded in Japan and repatriate their cash.

Yesterday, the Reserve Bank of New Zealand announced a 100 basis point cut of the official cash rate to 6.5%. The New Zealand dollar bounced on the bank’s statement before continuing its downward trend.

The downward trend for the New Zealand dollar is “quite well developed,” said Khoon Goh, senior markets economist at ANZ National Bank. In today’s trading, he expects it to range between 57.80 and 59.80 US cents, and 55.20 and 59.40 yen.

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