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NZ Dollar drops to 2-year low on Asian selling

Wednesday 13th August 2008

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The New Zealand dollar fell to a two-year low on selling out of Asia as the prospects of weaker economic growth and lower interest rates sapped demand for the currency.

The kiwi fell as low as 68.26 U.S. cents, the lowest since August 2006, and has dropped more than 10% in the past month. Asian investors, dominated by those in Japan, were lured to invest in kiwi assets because of better returns than they could get in yen.

"The currency is heading lower," said Danica Hampton, currency strategist at Bank of New Zealand. "The economic news surrounding New Zealand is not particularly positive at the moment."

The kiwi extended its decline after figures showed Japan's economy contracted last quarter, bringing the world's second-largest economic closer to its first recession in six years.

In New Zealand, figures this week showed house prices in Auckland fell last month and the number of property sales dwindled, suggesting the economy's slump has sapped demand in New Zealand's biggest city.

Reserve Bank Governor Alan Bollard last month cut the official cash rate a quarter point to 8% and said more reductions are possible this year, provided inflation abates as expected from a third-quarter peak and the currency doesn't decline excessively.

BNZ's Hampton said the currency is likely to fall below 60 cents "some time between now and 2010." Short-term, 68.20 U.S. cents is a key support level. Any bounces are likely to be capped at 70.50 cents or 70.80 cents "at a stretch," she said.

By Jonathan Underhill

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