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NZ dollar tumbles as threat of debt contagion sweeps globe

Friday 7th May 2010

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The New Zealand dollar tumbled 2% as equity markets slumped amid fears sovereign debt issues in the so-called PIGS (Portugal, Greece, Ireland and Spain) may spread through Europe, sapping investors’ appetite for higher-yielding, or riskier, assets.  

The Volatility Index, or VIX, commonly known as Wall Street’s ‘fear gauge’, spiked up to its highest level in 12 months as stocks on Wall Street slumped as much as 8% after US Federal Reserve officials warned Europe’s debt crisis could seep across the Atlantic. Investors flooded to so-called safe havens such as the US dollar and yen as the European Central Bank added to the debt concerns after it said it hadn’t considered introducing measures to ease fears in a surprisingly optimistic outlook on the Eurozone economy.  

“It was all about fear and panic in the markets last night” after the ECB’s upbeat assessment of the Eurozone rattled investors, said Mike Jones, strategist at Bank of New Zealand. The shock in the market “saw the kiwi sold off heavily.”  

The kiwi slumped to 71.07 US cents from 72.49 cents yesterday, and tumbled to 64.22 yen from 67.96 yen. It sank to 67.67 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 68.76, and increased to 80.24 Australian cents from 80.08 cents. It slipped to 47.87 pence from 48.15 pence yesterday, and declined to 56.30 euro cents from 56.74 cents.  

Jones said the currency may trade between 70 US cents and 71.80 cents today with all eyes on how Asian markets react to the panic in the Northern Hemisphere markets.  

Yesterday’s strong employment data for the first three months of the year, which showed the jobless rate shrank to 6% from 7.3% in the December period underpinned upbeat sentiment for the kiwi, and prompted investors to bring forward their timing on central bank interest rate hikes.  

Jones said that timing may be off the table after yesterday’s action in the markets, but the Australian cross-rate will face further gains, with the Australian dollar likely to face bigger falls as the European debt crisis continues.  

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