NZ dollar slips on outlook for weakening world growth

By Paul McBeth

Friday 3rd October 2008

The New Zealand dollar fell below 66 US cents and dropped versus the yen on concern the widening credit squeeze will choke global economic growth, sapping demand for commodities and riskier investments.

Stocks on Wall Street extended their declines even after the US Senate approved a US$700 billion financial rescue plan, sending the legislation back to Congress with sweeteners including tax-breaks to try to win support in the House. The New Zealand dollar fell to 65.75 US cents from 67.03 cents, and dropped to 69.22 yen from 71.02 yen.

"As long as the credit market is shut, (the kiwi) will run weakly," said Michael Gordon, currency strategist at Westpac. Investors are moving away from higher yielding assets and "the yen and the Swiss Franc continue to deliver," he said.

The yen gained against most major currencies overnight. Investors can borrow cheaply in yen to invest in higher-yielding currencies, known as the carry trade. New Zealand's appeal as a high yielder is abating as the central bank embarks on a steep cycle of interest rate cuts to revive an economy that probably contracted rounded out three quarters of contraction on September 30.

New Zealand commodity export prices dropped 4.9% in September in global prices as dairy products fell 7.9%.

"A slide in commodity prices simply adds to the downside risks facing the New Zealand economy and the New Zealand dollar," said Danica Hampton, currency strategist at Bank of New Zealand.

The US dollar strengthened against the euro after the European Central Bank said policymakers were considering cutting interest rates in its region.

The London interbank offered rate rose for the fourth straight day, underlying the freeze in lending between banks and the lack of liquidity in credit markets. Westpac's Gordon said Libor may ease once a bailout package, "of some form or other," is passed by the US House of Representatives. "Banks and financial institutions are holding on to their cash, and are hoping the US Government will buy the toxic assets," he said.

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