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Dollar heads for drop on signs of global slump

By Paul McBeth

Friday 14th November 2008

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The New Zealand dollar is heading for a weekly slump as evidence mounts of a global economic slowdown that will trim demand for the nation's exports and sap demand for the currency.

The Organisation for Economic Cooperation and Development is urging governments to stimulate their economies after predicting a recession for its members in 2009. Germany's economy contracted more than expected in the third quarter, in its worst recession in 12 years. In the US, the number of Americans on the unemployment benefit jumped to a 25-year high while Treasury reported a record deficit of US$247.2 billion last month, up from US$56.8 billion a year earlier.

"The New Zealand dollar's being driven by fears of a global recession," said Danica Hampton, currency strategist at Bank of New Zealand. "There's no quick fix - markets are still suffering."

The kiwi fell to 55.52 US cents from 55.69 cents yesterday, bringing its decline in the past week to almost 6%. In the last three months it has fallen 21% from 69.92 cents on Aug. 14. It strengthened to 53.42 yen from 53.36 yesterday, and fell to 86.41 Australian cents from 87.13 cents.

Hampton said the dollar may trade between 55.20 and 56.50 US cents today. While she does not expect it to continue its decline today, "it may happen next week."

In New Zealand, the Babk of New Zealand - NZ Business Performance of Manufacturing Index marked a record low in October, its sixth month of contraction, on declining orders and lower production. Retail sales volumes fell 0.9% in the third quarter, the third decline in a row.

Outgoing Minister of Finance Michael Cullen released the Treasury's briefing note to the incoming government yesterday, which showed wider deficits than forecast in the pre-election fiscal and economic update just six weeks ago. That may encourage Reserve Bank Governor Alan Bollard to continue slashing the official cash rate. Bollard has been cutting rates since July in the sharpest easing cycle since the OCR was introduced in 1999.

Joshua Williamson, senior strategist at TD Securities in Sydney, predicts the central bank will cut its benchmark rate by 100 basis points in December "to rescue the consumption data from further declines."

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