Dollar falls to 10-month low on outlook for rate cuts

Wednesday 30th July 2008

The New Zealand dollar fell to a 10-month low after news of more financial company difficulties and weak economic data stoked expectations the central bank has embarked on a series of interest-rate cuts.

The kiwi fell as low as 73.47 US cents and was recently at 73.85 cents, down from more than 74 cents yesterday. It slipped to 79.82 yen.

The decline comes after figures yesterday showed a drop in home-building consents and New Zealand Guardian Trust suspended payments from one of its funds. Bank of New Zealand says the kiwi may reach 70 US cents by year-end.

The currency has been "pressured by ongoing concerns about the health of the economy and a rebound in the US dollar," said Danica Hampton, currency strategist at BNZ. Weak data is consistent with the bank's view that the economy "is teetering on the brink of recession."

The US dollar gained in New York against the euro and the yen as the price of oil fell on comments from OPEC President Chakib Khelil that prices for crude oil are "abnormal." The long-term price could recede to US$70 to US$80 a barrel should the US dollar strengthen and geopolitical tensions ease.

The New Zealand dollar has declined since Reserve Bank Governor Alan Bollard reduced the official cash rate a quarter point to 8% and said further cuts are likely provided inflation tracks as expected and the kiwi doesn't depreciate excessively. He didn't define an excessive drop.

Bollard next reviews interest rates on September 11 and has two further reviews scheduled this year on October 23 and December 4. Economists including Robin Clements at UBS expect Bollard to cut rates at each review.

By Jonathan Underhill

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