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Dollar holds near five year low ahead of rate cut

By Paul McBeth

Wednesday 3rd December 2008

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The New Zealand dollar traded near a five year low as investors await the central bank's review of interest rates, amid expectations it will make a record cut to revive a stalled economy.

Central bank Governor Alan Bollard will cut the official cash rate by 150 basis points to 5%, its lowest level in five years, as he moves to hasten the recovery of the New Zealand economy. The Reserve Bank of Australia yesterday cut its benchmark rate by 100 basis points to 4.25%, greater than the forecast 75 point cut.

"At 100, the markets would be disappointed, and the dollar would probably fall," said Imre Speizer, currency strategist at Westpac Corp. "A 150 point cut should be neutral" for the dollar.

The kiwi rose to 52.86 US cents from 52.63 cents yesterday, and increased to 49.19 yen from 48.83 yen yesterday. It clawed back some of its losses against the Australian dollar following the RBA's rate cut, rising to 82.72 cents from 82.46 cents.

Speizer said the rally in global stocks overnight helped underpin the kiwi dollar though it is likely to "softly nudge down" as investors prepare for tomorrow's rate cut. The currency may trade between 52.50 US cents and 53.50 cents today, he said.

Central banks worldwide are stepping up efforts to thaw credit markets and restore growth in the face of a deepening economic slump. After an emergency meeting, the Bank of Japan decided to retain its benchmark rate at 0.3%, but will accept lower-grade corporate bonds and will set up a new lending facility to improve liquidity for business.

New Zealand's relatively high interest rates have helped support the kiwi dollar as investors sought higher-yielding assets funded with yen loans. The gap between benchmark rates in Japan and New Zealand is 6.2 percentage points.

Central banks in Europe are expected to continue with their series of aggressive rate cuts this week, with the Bank of England likely to cut its benchmark rate by 100 basis points to 2.00% and the European Central Bank to cut its rate by 75 basis points to 2.75%.

In July, Bollard embarked on the sharpest series of cuts to the OCR since its inception in 1999, cutting 175 basis points in three meetings.

Danica Hampton, currency strategist at Bank of New Zealand, said the "slew of interest rate cuts will be viewed as simply confirming the dire state of the global economy," which may spur demand for US dollars and the yen.

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