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Dollar falls on concern global economy won't avoid recession

By Paul McBeth

Wednesday 15th October 2008

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The New Zealand dollar fell on concern weakening profits at US companies may signal a global downturn that will erode demand for the nation’s exports, extending the domestic economy’s slump.

PepsiCo Inc., the world’s biggest snack maker, tumbled 14% after lowering its profit forecast, while Microsoft Corp. and Intel Corp. slipped over 4% on concern demand for computers will abate. Bloomberg News cited New York University professor of economics Nouriel Roubini as saying the US is headed for its worst recession in 40 years. US stock indexes fell even as the US Treasury announced plans to spend US$250 billion buying stakes in the nation’s major banks.

“Profit is the next focus once the financial sector settles down,” said Michael Gordon, market economist at Westpac. “Yesterday’s rally was one in a lifetime.”

The New Zealand dollar fell to 62.06 US cents from 62.27 cents rising as high as 63.28 cents before US stocks started to fall. It slipped to 63.14 yen from 63.74, reaching 65.08 overnight. The Australian dollar mirrored the kiwi, falling to 70.15 US cents from 70.82 cents, with an overnight high of 72.25 cents.

Gordon said New Zealand’s dollar “needs to fall to a lower level for an extended period” to cope with “weaker world demand and lower commodity prices.”

New Zealand’s central bank is forecast to slash the official cash rate (OCR) as much as 100 basis points on October 23 to 6.5% and economists at ANZ Bank predict the OCR will fall as low as 4.75% early next year. Governor Alan Bollard has embarked on a steep easing cycle to help revive an economy in its first recession in a decade.

Danica Hampton, currency strategist at the Bank of New Zealand said the kiwi is likely to extend its decline as economic conditions worsen.

Global efforts to restore the financial markets and save banks from collapse “are unlikely to stave off a global recession,” Hampton said.

“Combined with a sharply slowing New Zealand economy, further RBNZ interest rates cuts and falling commodity prices” the New Zealand dollar is likely to “trend lower in coming months,” she said.

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