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Dollar falls before current account

By Paul McBeth

Monday 22nd December 2008

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The New Zealand dollar fell as the US automaker bailout lifted the US dollar and amid expectations of a widening current account deficit and contracting economy at home.

Over the weekend, outgoing US President George W. Bush announced a rescue package of US$13.4 billion in emergency loans for General Motors Corp. and Chrysler LLC to stave off a collapse and protect over one million jobs.

In New Zealand, the economy may have contracted 0.5% in the third quarter, more than twice as bad as Reserve Bank expects, according to a Reuters survey. New Zealand's balance of payments data due out this morning is predicted to show a widening current account deficit year-on-year to $15.51 billion.

"Once the numbers are out, we'll have some clear idea of where we're going," said Tim Kelleher, corporate risk manager at ASB Bank. If the current account deficit is "significantly worse" that could be an "excuse" for the kiwi to fall further.

The New Zealand dollar fell to 57.55 US cents from 57.86 cents on Friday, and dropped to 51.33 yen from 51.41 yen. It was down to 84.26 Australian cents from 84.51 cents on Friday, and rose to 41.36 euro cents from 41.09 cents.

Kelleher said it may trade between 57 US cents and 58 cents today.

A deeper contraction in the New Zealand economy may force central bank Governor Alan Bollard to continue slashing interest rates in January to revive slumping domestic demand. Bollard has cut the official cash rate 325 basis points to 5% since he embarked on the steepest series of cuts since the inception of the OCR in 1999.

ANZ National Bank chief economist Cameron Bagrie expects the OCR will drop below 4% some time in the New Year.

The Bank of Japan slashed its benchmark rate 20 basis points to 0.1% last week, and announced plans to buy corporate debt as it seeks to stave off its recession.

Japanese Prime Minister Taro Aso announced his government's expenditure will increase to a record 88.5 trillion yen as he tries to revive his flagging economy and lift his popularity.

The deterioration in the US economy has prompted President-elect Barack Obama to expand his fiscal stimulus package, aiming to create or save three million jobs over the next two years. The White House Task Force on Working Families will be lead by Vice President-elect Joe Biden, with the goal of improving education and training to protect the incomes of middle-class and working families.

A further US$4 billion may be made available to GM in February provided Congress approves the second half of the US$700 billion Trouble Asset Relief Program, and the Canadian government will supplement this further with a C$4 billion package for GM and Chrysler.

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