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Dollar gains as Fed cuts rates

By Paul McBeth

Thursday 30th October 2008

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The New Zealand dollar extended its gain from a five-year low against the US dollar after the Federal Reserve cut interest rates to help avert a global recession and prices of commodities increased.

The Fed cut its benchmark rate 50 basis points to 1%, matching a half-century low. The move helped drive up prices of raw materials and encouraged some investors to return to seek higher-yielding assets funded with loans in yen. New Zealand’s exports, dominated by dairy products, meat, wool and forest products, rose 21% in the 12 months ended September 30.

“Commodities had some stunning gains,” said Michael Gordon, economist at Westpac. “It’s a reflection of increasing risk appetite.”

The kiwi rose to 59.06 US cents from 57.40 cents yesterday and jumped to 58 yen from 55.91. It fell to 86.65 Australian cents from 88.96.

Germany Chancellor Angela Merkel said her government will announce a “bold” package of additional measures to lift the economy. Norway's central bank cut its benchmark interest rate by 50 basis points 4.75%.

The People's Bank of China yesterday lowered its one-year lending rate to 6.66% from 6.93%. It also reduced the deposit rate to 3.6% from 3.87%. Speculation is rising that the Bank of Japan may lower rates after a newspaper report said it was weighing the move.

The recovery in investors’ appetite for risk may help lift the kiwi to as high as 60 US cents today, according to Danica Hampton, currency strategist at Bank of New Zealand.

Still, she cautioned against getting “overly bullish” about the New Zealand dollar.

“While the recent central bank rate cuts are encouraging, they will not be enough to prevent a global recession,” she said. “As a commodity exporting nation the fortunes of New Zealand and the New Zealand dollar are inherently tied to global growth.”

Figures this week are expected to show the US economy contracted 0.5% in the third quarter and probably slipped into recession in the current three months.

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