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Dollar falls on signs of global slump

By Paul McBeth

Thursday 16th October 2008

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The New Zealand dollar fell on rising fears of a global recession which saw share markets tumble around the world, prompting investors to move away from higher-yielding, or riskier, assets.

Prospects of a worldwide slump and a recession in the US drove down prices of commodities, hurting the currencies of countries that rely on exports of raw materials and farm products. The Reuters/Jefferies CRB Index of 19 commodities fell almost 3%. The Dow Jones Industrial Average fell 7.9% and the FTSE 100 dropped 7.2%.

US Federal Reserve Chairman Ben Bernanke told the Economic Club of New York that there was a “significant threat” to the US economy, while government figures showed retail sales had the biggest declined in three years.

“We’re seeing wholesale selling of riskier assets,” said Tim Kelleher, corporate risk manager at ASB Bank. “Commodity prices have collapsed” helping push the New Zealand and Australian dollars down, he said.

The New Zealand dollar fell to 60.65 US cents from 61.71 cents yesterday, and dropped to 61.12 yen from 62.27. The Australian dollar fell to 67.34 US cents from 69.36.

New Zealand’s merchandise exports rose 34% to NZ$3.57 billion in August, the latest figures available. Still, shipments to the US, the nation’s third-largest export market, fell 4.5% to NZ$298 million.

Kelleher said ASB Bank is predicting the central bank will slash the official cash rate by 75 basis points on October 23 to 6.75% to help lift the economy out of its first recession since 1998. Governor Alan Bollard has embarked on his steepest easing cycle since 2001 and economists expect he will continue lowering the OCR into early 2009.

The kiwi may trade in a range of 59.75 US cents to 61.25 cents today, and between 59.5 yen to 62 yen. The currency may be more likely to trade in the lower half of the range, Kelleher said.

The New Zealand dollar has been a favourite for the carry trade, where investors borrow cheaply in currencies such as the yen to invest in higher-yielding assets. When global markets tumble, investors typically become more risk averse and exit carry trades.

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