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NZ dollar tumbles after US rescue plan fails

By Paul McBeth

Tuesday 30th September 2008

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The New Zealand dollar fell 2% after the US House of Representatives rejected the US$700 billion rescue package, prompting investors to shy away from higher yielding, or riskier investments.

Congress voted down the proposal put forward by the Bush administration by 228 to 205, despite support by the congressional leaders of both parties. Markets plunged as the House rejected the bailout, with the Dow Jones Industrial Average falling 5%.

�We need to wait for some clarity about the bailout,� said Michael Gordon, markets economist at Westpac New Zealand. �The markets are very nervous.�

The kiwi fell to 67.22 US cents from almost 69 US cents after the vote. It dropped to 69.84 yen from 73 yen. The Australian dollar tumbled 3% against the US dollar.

New Zealand�s banks are mainly Australian owned and typically don�t have large portfolios of toxic, mortgage-related assets as lender in the US have carried. Still, returns for New Zealand investors have been dented by turmoil in world markets.

Global chill

The New Zealand Superannuation Fund yesterday announcing a NZ$881 million full-year loss, and a negative 4.92% return for the year. Figures last week confirmed New Zealand�s economy had tipped into recession.

Bank of New Zealand�s risk appetite index has plunged to 28%, with global investors moving to safer currencies such as the Swiss franc and the yen.

Westpac�s Gordon said New Zealand isn�t as vulnerable against the yen as it has been in the past few years, with fewer Japanese retailer investors holding the kiwi.

While shares and oil fell on the news, US Treasury bonds and gold have rallied as investors looked for safer options.

The failed proposal hasn�t dimmed expectations that the Reserve Bank will cut the official cash rate by 50 basis points next month. Gordon said the central bank has to manage the credit squeeze and match market rates.

Gordon expects the US dollar will be undermined by the next rescue package, and his broader view is that the currency will weaken.

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