NZ dollar falls as market turns on Portuguese debt

Tuesday 30th November 2010

The New Zealand dollar is heading for its first monthly decline since August as investors' nerves over the European sovereign debt crisis shifts its focus to Portugal.

The kiwi dollar has dropped 2.8% this month, the first fall in two months, as Europe's ongoing woes to rein in government debt reignited fears about the state of the world’s recovery. Following the 85 billion euro aid package for Ireland, the focus has shifted to Portugal, Italy and Spain, the remaining PIIGS that haven't been bailed out, with Portuguese 10-year government bonds rising to a record 450 basis points above German bunds, some 150 basis points above where they were through most of October. European Union Commissioner Olli Rehn told an Irish reporter "Portugal needs to assure stronger fiscal consolidation continuing in 2012," while New York economist Nouriel Roubini said it might be a "good idea" for Portugal to ask for help as a preventative measure.

"Europe's pool of funding is not big enough to cover Spain" and the nation's large finance sector, said Mike Jones, strategist at Bank of New Zealand. "It's a pretty familiar story and looks as if risk aversion is firmly entrenched in the market at the moment" which will keep the kiwi dollar under pressure, he said.

The kiwi fell to 74.48 US cents from 74.94 cents yesterday, and was little changed at 68.07 on the trade-weighted index of major trading partners' currencies from 68.13. It declined to 62.78 yen from 62.98 yen yesterday, and was little changed at 77.62 Australian cents from 77.64 cents. It rose to 56.84 euro cents from 56.58 cents yesterday, and slipped to 47.88 pence from 47.97 pence.

Jones said the currency may trade between 74 US cents and 75 cents today as it waits to take its cues from American, European, and Chinese performance of manufacturing indices over the next couple of days. Local building consents data isn't expected to have much bearing on the currency, nor is Australian balance of payments and building data.

Italy is back in the spotlight of Europe's sovereign debt, with a government bond auction struggling to attract demand, pushing up two-year yields 40 basis points to 2.9%.

BusinessDesk.co.nz

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