NZ dollar plummets to near 6-month low on global recession fears

Friday 23rd September 2011

The New Zealand dollar plummeted to near a six-month low against the greenback amid fears the economic crises in Europe and the U.S. are snowballing beyond the control of policymakers.

The New Zealand dollar recently traded at 77.50 U.S. cents, down from 79.10 cents yesterday, its lowest level since April 5, and the currency dropped to 69.25 on the trade-weighted index of major trading partners' currencies from 70.07 previously.

Global equities were routed a day after the U.S. Federal Reserve launched 'operation twist', a bid to lower the costs of business and home borrowing, a clear sign that markets were losing confidence in the ability of central bank's ability to prevent the U.S. economy from slipping back into recession.

Investor confidence was also hit by a run of poor data, with the private sector activity indices in Europe and China declining sharply in September, and new claims for U.S. jobless benefits remained high. Speculation has grown that the U.S. government is headed for another budget fight emerged yesterday after the House of Representatives unexpectedly defeated a bill that would fund the Federal Government past Sept. 30.

"The global risk falls were due to the residual effects of the Fed saying the U.S. economic outlook is weak, and PMI data in the Euro zone and China was weak, which all together is providing a picture of global economic weakness" said Imre Speizer, a market strategist for Westpac Banking Corp. "That fundamental picture is now assuming more weight in the minds of investors, and causing them to worry about risk."

On Wall Street, the Standard & Poor's 500 Index tumbled 3.2% to 1,129.56, while Europe's Stoxx 600 Index dropped 4.6% to 214.89. Growth-linked currencies such as the kiwi and Australian dollar were also impacted by sharp drop in commodities, with the 19-commodity Thompson Reuters Jefferies CRB Index falling 4.4% to 307.24.

The risk off tone saw a massive surge in demand for bonds, with the yield on the U.S. 10-year Treasury bills falling to 1.7%, its lowest level since 1945. Gold sat out the safe haven asset rally, with the strong U.S. dollar eroding the value of the precious metal, which recently traded at US$1,727.34 an ounce, down from US$1,770.74 yesterday.

On the crosses, the kiwi recently traded at 79.91 Australian cents, down from 79.37 cents yesterday, and fell to 59.10 Japanese yen from 60.45 yen previously. It dropped to 57.73 euro cents from 58.47 cents yesterday, and fell to 50.62 pence from 51.15 pence previously.

The kiwi may trade between a range of 77.50 U.S. cents and 80 cents, Speizer said, with further corrections towards the 72 cents area waiting in the wings next week.

(BusinessDesk)

BusinessDesk.co.nz

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