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NZ dollar falls as recession deepens, dim prospects for New Year

By Paul McBeth

Wednesday 24th December 2008

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The New Zealand dollar fell after data confirmed the economy sank deeper into recession, heightening concern that it will continue to spiral downward next year.

New Zealand's gross domestic product for the third quarter showed activity shrank by 0.4%, twice as much as the Reserve Bank of New Zealand's forecast. Bank of New Zealand economists predict the current quarter will show a contraction of 0.6%, and the first quarter of 2009 will show a further reduction. The widening of the current account deficit to 8.6% of GDP is expected to push the New Zealand dollar lower and reduce domestic demand.

"The climate and challenges we're facing in 2009 are a risk to the kiwi," said Mike Symonds, head of sales and foreign exchange at BNZ. During the holiday period, "the kiwi could go lower - to the 55.50 area."

The kiwi tumbled to 56.27 U.S. cents from 57.25 cents yesterday and dropped to 51.46 yen from 51.60 yen. It was down to 83.16 Australian cents from 83.81 cents yesterday, and fell to 40.60 euro cents from 40.79 cents.

Symonds said the kiwi may trade between 56.50 U.S. cents and 57 cents today, with activity on the currency markets "falling sharply" ahead of Christmas.

The weak GDP data will put more pressure on the central bank to revive the economy by continuing to cut the official cash rate early next year. Governor Alan Bollard has slashed the OCR 325 basis points to 5% after he embarked on the steepest series of cuts since its inception in 1999.

Central banks and policy makers around the world have been moving to protect their economies from the global economic slump that is refusing to abate. BNZ currency strategist Danica Hampton predicts the central bank will cut rates by at least 50 basis points when it meets in January.

The U.K economy fell deeper into recession, reporting a 0.6% contraction in GDP in the third quarter, its biggest decline since 1990. The Bank of England, which has already cut its benchmark rate to 2%, and Prime Minister Gordon Brown are struggling to shore up the economy as access to credit continues to tighten. The pound slipped against the U.S. dollar to $1.4742 from $1.484. One New Zealand dollar buys 38.41 pence, down from 38.55 yesterday.

Further signs of the ongoing credit crisis came with U.S. housing sales in November plummeting 7.6%, the biggest fall in 20 years. Resale median prices sank 13%, the largest slump since records began in 1968, and probably the largest since the Great Depression in the 1930s, the National Association of Realtors said.

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