Dollar falls over concern recovery will be muted

Friday 25th September 2009

The New Zealand dollar fell as weaker-than-expected home sales in the US spurred concern recovery in the world’s largest economy may not as stable as previously thought.

Stocks on Wall Street sank after home sales unexpectedly shrank 2.7% in August from a month early. That’s worse the 2.1% growth predicted by economists. The weaker data caused investors to eschew higher-yielding, or riskier, assets in favour of the relative safety of the greenback. The Dollar Index, a measure of the greenback versus a basket of five currencies, climbed 0.9% to 76.90.

“Safe-haven demand for the US dollar increased as weakening stock markets and fears about the strength of the US recovery took a toll on investors’ risk appetite,” said Mike Jones, strategist at Bank of New Zealand. “Today, the kiwi will probably remain a little bit heavy in this generally risk-averse environment.”

The kiwi slipped to 71.52 US cents from 72.32 cents yesterday, and dropped to 65.39 on the trade-weighted index, or TWI, a measure of the currency versus a basket of partners, from 65.68.

It declined to 65.25 yen from 65.46 yen yesterday, and eased to 48.82 euro cents from 48.92 cents. It was little changed at 82.67 Australian cents from 82.69 cents yesterday.

Jones said the currency may trade between 71.30 US cents and 72.30 cents today as the markets continue to see New Zealand as having a relatively stable economy. Still, he said the strength in the kiwi was “a little bit over-stated” on the back of the recession’s end and stronger forecast pay-out to dairy farmers.

The Federal Reserve, European Central Bank, Swiss National Bank and Bank of England announced they will begin scaling back some of the massive stimulus measures put in place to cope with the worst global recession since World War II. The Fed will trim its term auction facility, while the other central banks will reduce their US dollar swap operations.

The kiwi hit a new 12-year high against the pound, climbing as high as 44.88 pence, amid comments Bank of England Governor Mervyn King that a weak currency was beneficial to the British economy. It recently traded at 44.55 pence.

The Group of 20 nations leaders summit will continue into the weekend, and markets will look for more signs policy makers are preparing to unwind their fiscal support. Traders will also be looking for comment around the US dollar after German Chancellor Angela Merkel yesterday said exchange rates should be on the meeting’s agenda.

Businesswire.co.nz

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