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Dollar rises as stocks rally, weaker economy may cap gains

By Paul McBeth

Monday 3rd November 2008

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The New Zealand dollar rose as share markets in the US and Europe rallied on Friday amid signs credit markets are starting to thaw.

The Dow Jones Industrial Average climbed 11% last week, while the DAX 30 rallied 16%. The interbank cost of borrowing overnight dollar fell to 0.4% from 0.73% last week, a sign that banks are more willing to lend funds to each other. In New Zealand, Finance Minister Michael Cullen extended the government’s deposit guarantee scheme to include wholesale funds, bringing New Zealand into line with Australia.

The kiwi rose to 58.45 US cents from 57.44 cents on Friday and jumped to 57.71 yen from 55.9. Gains in the kiwi may be short-lived, with figures this week likely to show the economy is mired in a slump.

“The dollar is trading closely with equity markets,” said Khoon Goh, senior economist at ANZ. Still, the currency “will be thwarted by the labour market data,” due Thursday. “Everyone knows the global economy is down.”

He said the currency may trade in a range of 57.20 US cents to 59.20 today.

New Zealand’s unemployment rate is expected to rise to 4.3% from 3.9%, according to the consensus in a Reuters survey. Companies including Carter Holt have cut jobs as the economy endures its worst economic downturn since 1998.

The economy fell into recession in the first half of the year and some economists say it won’t revive until 2009.

In the US, payrolls shrank by 200,000 workers, according to a Bloomberg survey, while the jobless rate is forecast to jump to the highest in more than five years. Also this week, the Reserve Bank of Australia is expected to cut its benchmark rate by at least 50 basis points to 5.5%, Goh said.

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