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Dollar gains as stocks rally, credit market thaws

By Paul McBeth

Wednesday 5th November 2008

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The New Zealand dollar gained across the board as global stocks rallied after interbank lending rates fell, easing fears about the global credit crisis.

The Dow Jones Industrial Average rose 2.2% in its biggest election day rally since 1984, following gains in Asian and European markets. The London interbank offered rate, that banks charge each other for monthly loans in dollars, dropped for the 17th day in a row to 2.18%, its lowest level since 2004, increasing appetite for higher-yielding, or riskier currencies like the kiwi.

“Risk appetite is returning across the board,” said Tim Kelleher, corporate risk manager at ASB Bank. “The major thing is the Libor dropping” he said of the New Zealand dollar’s strength.

The kiwi rose to 60.52 US cents from 59.27 cents yesterday, and jumped to 60.48 yen from 58.68 yen. It increased to 46.63 euro cents from 46.73 cents after rising as high as 47.30 cents. Kelleher predicts it may trade between 60 and 61.25 US cents today.

Overseas investors have typically been attracted to the Australian and New Zealand currencies because of the countries’ high interest rates, funding their investments with low interest loans in Japanese yen.

Offshore holdings in New Zealand Government bonds were almost $14 billion, or 74% of the debt in the market in September, according to central bank figures.

A thaw in credit markets probably doesn’t yet herald a pick up in economic growth, according to Bank of New Zealand currency strategist Danica Hampton.

Figures tomorrow will probably show New Zealand’s jobless rate increased to 4.3% in the third quarter, from 3.9% in the second. The domestic economy may extend its recession through until the end of 2008, some economists say.

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