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NZ dollar slips below 71 US cents as Indian central bank hikes rates

Monday 22nd March 2010

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The New Zealand dollar fell below 71 US cents for the first time in a week as investors’ appetite for higher yields was sapped by the prospect of tighter monetary policy in emerging nations after India’s central bank hiked its benchmark interest rate.  

The Reserve Bank of India raised both the reverse repurchase rate and repurchase rate by 25 basis points to 3.5% and 5% respectively. Governor Duvvuri Subbarao said controlling inflation was “imperative” to the world’s second most populous nation.

The move surprised markets as it came a month before the bank’s scheduled monetary policy meeting, and bolstered support for the greenback. The Dollar Index, a measure of the US dollar against a basket of five currencies, rose 0.4% to 80.76.  

“People are worried about the Bank of India’s decision and what it means for other emerging central banks,” said Danica Hampton, currency strategist at Bank of New Zealand. The kiwi will take its direction from how “Asian markets digest the Bank of India news.”

The kiwi dropped to 70.80 US cents from 71.16 cents on Friday in New York, and slipped to 65.68 on the trade-weighted index, or TWI, a measure of the currency against a basket of six trading partners, from 65.71. It sank to 64.04 yen from 64.36 yen last week, and was little changed at 77.35 Australian cents from 77.34 cents.

It decreased to 52.27 euro cents from 52.33 cents on Friday, and rose to 47.09 pence from 46.98 pence.  

Hampton said the currency may trade between Friday’s low of 70.66 US cents and 70.80 cents today as it takes its lead from Asian equity markets.  

Investors’ sentiment for so-called risky assets was also sapped by ongoing confusion as to whether or not the European Union will support Greece through its financial woes after Chancellor Angela Merkel told Parliamentarians that the International Monetary Fund may be the only solution to the Mediterranean nation’s debt concerns.

The EU will hold a summit at the end of the week which is expected to reach some kind of accord on the matter.  Adding to investors’ concerns about the Euro-zone the Bank of England’s Monetary Policy Committee member Andrew Sentance said the UK could face a “double-dip recession” in an interview on CNBC. 


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