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Dollar hits 10-week high on US dollar weakness

By Paul McBeth

Friday 20th March 2009

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The New Zealand dollar hit a 10-week high versus the US dollar as the greenback slumped against most major currencies on the Federal Reserve plan to begin quantitative easing to revive its flagging economy.

The trade-weighted Dollar Index, which measures the US dollar's performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, tumbled 2.7% yesterday, its biggest one-day fall since 1971, after the Federal Open Market Committee said the Fed would buy US$300 billion of US Treasuries and double purchases of mortgage-backed securities.

The Conference Board's index of leading indicators, a measure of the US economy's future performance, fell 0.4% in February, while the number of Americans collecting unemployment benefits rose to a record 5.5 million.

"Everyone was surprised the Fed went ahead with quantitative easing," said Philip Borkin, economist at ANZ National Bank. "The New Zealand dollar outperformed other crosses with the markets being a little short on the kiwi."

The kiwi dollar jumped to 55.49 US cents, briefly touching a ten-week high 56.05 cents, from 54.32 cents yesterday, rising 4.7% this week. It rose to 52.39 yen from 51.95 yen yesterday, and increased to 80.89 Australian cents from 80.14 cents. It gained to 40.56 euro cents from 40.30 cents yesterday.

Borkin said the currency may trade between 55.55 US cents and 57.78 cents and will continue to follow equity markets closely ahead of the release of the fourth-quarter gross domestic product data and terms of trade next week. Following the unexpected move by the Fed, ANZ National will review its forecast for the currency when "things have settled down," but it still predicts the kiwi will fall in the medium-term.

A soft result in the GDP figures will stoke expectations that the official cash rate will trough at 2%, said Danica Hampton, currency strategist at Bank of New Zealand. BNZ forecasts the lagged indicator will show the economy shrank 1.1% in the three months to December 31, "considerably worse than the -0.8% anticipated by the RBNZ in its March Monetary Policy Statement", she said.

The New Zealand dollar rallied when the central bank cut the OCR by 50 basis points to a record 3% last week as Governor Alan Bollard predicted the recession would bottom out in the first half of this year.

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