Dollar falls to four-week low, may extend drop on ailing economy

Wednesday 14th January 2009

The New Zealand dollar fell to its lowest level in four weeks as signs of a prolonged economic slump stoked expectations the central bank will make a deeper cut to interest rates when it reviews monetary policy at the end of the month.

Governor Alan Bollard may lower the official cash rate 100 basis points to 4%, according to economists at Westpac Banking Corp. Government figures today showed consents for new dwellings fell to 1,168 in November, the lowest since 1992.

Yesterday's Quarterly Survey of Business Opinion showed companies are the gloomiest about their own activity this quarter since at least 1970.

Meantime, Standard & Poor's said it may cut the nation's AA+ foreign currency debt rating amid a yawning current account gap and widening budget deficits.

The New Zealand dollar fell as low as 54.65 US cents from 56.18 cents late yesterday, bringing its three-day slide to almost 9%. It was recently at 55.52 cents. Against the Australian dollar, it fell to 83.16 cents from 84.57 cents. The kiwi dropped to 49.47 yen from 51.25 yen and against the euro fell to 41.91 euro cents from 42.97.

"The combination of concern about the global outlook and the deteriorating local backdrop should ensure bounces in the (New Zealand dollar) are limited," said Danica Hampton, currency strategist at BNZ. "A deeper correction back towards November's sub-0.5200 lows shouldn't be ruled out over the coming weeks."

Bollard may continue the central bank's steepest easing cycle since introducing the OCR in 1999, pushing the rate down to 3.5%, Hampton said.

The kiwi dollar also fell as renewed concerns about weak corporate earnings worldwide and further pain for banks reduced investors' appetite for riskier, or higher-yielding assets. The US dollar strengthened after figures showed a slump in US imports, narrowing America's trade deficit, as consumer demand sagged and the price of crude oil tumbled.

Federal Reserve Chairman Ben Bernanke yesterday said the federal government's fiscal stimulus efforts may not be sufficient to ensure the long-term revival of the US economy. Meantime, the European Central Bank is expected to cut its cash rate by 50 basis points to just 2% when it meets this week.

By Jonathan Underhill

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