Dollar extends slide

Wednesday 28th October 2009

The New Zealand dollar extended its losses this week as US consumer confidence unexpectedly fell, encouraging investors to eschew higher-yielding, or riskier, assets amid concern the global economic recovery won’t be as speedy as hoped.

The Conference Board’s confidence index fell to 47.7, lower than the 53.5 forecast, adding to signs of a recovery that is lagging behind expectations. The Dollar Index, a measure of the greenback against a basket of six major currencies, edged up 0.3% to 76.16 as investors return to the relative safety of the US dollar.

New York University professor Nouriel Roubini told a conference in South Africa that investors risk creating a “huge” bubble by borrowing dollars to buy higher-yielding assets, calling the current situation “the mother of all carry trades.”

“Consumer sentiment was quite a bit weaker than expected and adds to the growing number of US data that points to a slip below expectations,” said Imre Speizer, markets strategist at Westpac Banking Corp. “It had a pretty small effect on equity markets, and more of an impact on the currency,” with the US dollar extending its gains, he said.

The kiwi dropped to 74.32 US cents from 74.75 cents yesterday and declined to 66.96 on the trade-weighted index, or TWI, a measure of the currency against the greenback, euro, yen, pound and Australian dollar, form 67.16. It fell to 68.23 yen from 68.65 yen yesterday and was little changed at 50.24 euro cents from 50.20 cents. It slipped to 81.22 Australian cents from 81.45 cents yesterday, and decreased to 45.36 pence from 45.56 pence.

Speizer said the currency may trade between 74.20 US cents and 75.20 cents today, with the National Bank Business Outlook and Australian inflation data the key data releases in the Asia-Pacific region.

The National Bank business confidence survey will probably show the outlook for the New Zealand economy is continuing to improve, particularly in employment intentions, according to Speizer. Still, he doubts it will show the sharp gains of recent surveys.

Australia’s consumer price index data is expected to have increased 0.8% in the three months through September, according to a Reuters survey, and Speizer said the number will have a major bearing on how much the Reserve Bank of Australia hikes interest rates when it meets next week.

“If it’s a stronger CPI, people would expect a 50 point hike, and if it’s something less than that, it’s much more probable to be a 25 point hike,” Speizer said.

The RBA became the first G-20 nation to begin tightening monetary policy this month, and in doing so, increased the interest rate differential between New Zealand and Australia.

The Reserve Bank of New Zealand will review the official cash rate tomorrow, and while Governor Alan Bollard is expected to keep the OCR at a record-low 2.5%, traders will closely watch the wording of his statement.

Bollard has repeatedly said interest rates will remain “at or below” current levels until late next year, and markets will be looking for a softening on this rhetoric to let Bollard lift rates earlier than expected without losing his credibility.

Businesswire.co.nz

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