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Dollar gains on prospects of widening yield advantage

By Paul McBeth

Tuesday 16th December 2008

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The New Zealand dollar rose on expectations interest rate cuts in the US this week will stoke the appeal of higher-yielding, or riskier currencies.

Figures yesterday showed a record low in confidence among US builders and a contraction in manufacturing, adding to pressure on the Federal Reserve to cut its benchmark rate to alleviate the recession. The fed is poised to cut its target rate by 50 basis points to 0.5%, according to a Reuters survey. New Zealand's official cash rate is 5%.

ASB Bank corporate risk manager Tim Kelleher said low US interest rates make the higher yields available on the kiwi dollar look relatively more attractive. With the current level of yield in the US, he said it's like "you're paying them to look after your money."

The kiwi rose to 55.30 US cents from 55.29 cents yesterday. It fell to 50.06 yen from 50.10 yen yesterday, and dropped to 40.44 euro cents from 41.07 cents.

Kelleher said the New Zealand dollar may trade between 54.80 US cents and 55.75 cents today.

ASB Bank forecasts the US dollar may fall to 48 US cents by March next year, though should commodity prices improve, they "will pull the Australian and New Zealand currencies with them," he said.

ANZ National Bank yesterday predicted the kiwi dollar will fall as much as 19% to 45 US cents next year.

Investors are also awaiting the release of minutes of the Reserve Bank of Australia's December 3 meeting, where it lowered the target rate by 100 basis points to 4.25%, or 275 basis points, since September. The kiwi fell to 82.98 Australian cents from 82.86 cents yesterday. Australia is New Zealand's biggest export market.


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