Dollar falls vs pound as UK slashes spending, hikes taxes

Wednesday 23rd June 2010

The New Zealand dollar fell against the pound after the UK’s emergency budget slashed government spending and hiked consumption tax, while at home traders await the balance of payments.

Fitch Ratings approved of Britain’s budget, saying it would “materially strengthen confidence in the UK’s AAA rating,” after Chancellor of the Exchequer George Osborne announced the government will cut spending by 25% over four years, excluding the National Health Service, while at the same time hiking VAT to 20% from 17.5%. The UK’s fiscal deficit is forecast to fall to 2.1% of gross domestic product by 2014 from its present 11%, and helped underpin support for the pound, which climbed 0.7% to US$1.4809.

The British budget “signals they’re going to hack and slash, providing support for UK sentiment, and shows grim determination to make the cuts needed,” said Mike Jones, strategist at Bank of New Zealand.

“The budget will likely keep the kiwi from going above 49 pence,” though it “won’t go below 43 pence for the foreseeable future.”

The kiwi dollar will probably find support from investors today with balance of payments data expected to show the current account deficit shrank to 2.7% of GDP in the first three months of the year, according to a Reuters survey, from 2.9% in the December quarter.

The kiwi sank to 47.58 pence from 47.95 pence yesterday, and edged down to 70.49 US cents from 70.55 cents. It dropped to 67.84 on the trade-weighted index of major trading partners’ currencies from 67.92 yesterday, and slipped to 63.72 yen from 63.87 yen. It rose to 80.74 Australian cents from 80.64 cents yesterday, and was little changed at 57.41 euro cents from 57.47 cents.

Jones said the currency may trade between 70.15 US cents and 71.20 cents today, with a stronger current account balance likely to offer it some support from investors, and the growing yield advantage will attract buying on dips and keep it above 70 cents.

Weak housing data in the US kept stocks on Wall Street subdued, with the Standard & Poor’s 500 index falling 1.6%.

The Federal Open Market Committee will review the Federal Funds rate today in the US, and may be a bit more downbeat given the softer data over the past month.

Businesswire.co.nz

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