Dollar holds below 62 US cents after Irish rating downgrade

Tuesday 9th June 2009

The New Zealand dollar held below 62 US cents after a second downgrade to Ireland’s credit rating erased investors’ appetite for higher-yielding, or riskier, assets and stoked demand for the greenback.

The US dollar rose to the highest level in a week against the euro as Standard & Poor’s cut Ireland’s sovereign credit rating to AA from AA+ and maintained a negative outlook.

Also weighing on the euro were rumours that German bank West LB had considered seeking bankruptcy. The greenback also benefitted from the continued sell-off of short-dated Treasuries, with two-year yields up more than 40 basis points to 1.42% in the past week.

New Zealand-US three-year swap spreads have declined some 0.4 percentage points to in the past seven days, and the kiwi has declined with a reduced yield appeal.

The slump in the euro “helped keep the kiwi and Aussie dollars under pressure,” said Danica Hampton, currency strategist at Bank of New Zealand, referring to the currencies by their colloquial names. “There’s further reduced yield appeal” for the kiwi as investors continue to support short-term Treasuries, she said.

The kiwi was little changed at 61.94 US cents from 61.75 cents yesterday, and slid to 44.54 euro cents from 44.70 cents. It gained to 61.03 yen from 60.83 yen yesterday, and declined to 78.51 Australian cents from 78.78 cents yesterday. The kiwi fell to 59.21 on a trade weighted index, basis or TWI, from 59.27 yesterday.

Hampton said the currency may trade between 61.25 US cents and 62.40 cents today as investors prepare for the Reserve Bank’s review of the official cash rate on Thursday. She predicts there may be a sell-off in the currency as people buy US government bonds to limit their exposure to the kiwi amid New Zealand’s declining yield advantage.

Economists are divided over whether central bank Governor Alan Bollard will hold the official cash rate unchanged at 2.5%, or cut the benchmark index a further 25 basis points, as he moves to revive a flagging economy that probably extended its recession into a sixth consecutive quarter, according to the Treasury.

Bollard embarked on the steepest series of cuts to the OCR, slashing 575 basis points since July, when he first moved to protect New Zealand’s economy as global liquidity dried up.

Building volumes in the first three months of the year are expected to have slumped 8% from the previous quarter, according to BNZ economists, in a sign the first quarter of this year was the deepest part of the recession, and the economy is back on an upwards trajectory. The data is due out this morning.

Businesswire.co.nz

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