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NZ dollar falls to 3-week low as Italian bond sale stokes Euro-zone fears

Thursday 15th December 2011

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The New Zealand dollar fell to a three-week low against the greenback, dropping below 75 cents after Italy was forced to pay a euro-era high yield to sell bonds, adding to fears the region is failing to contain its debt crisis.

The kiwi fell to 75.01 US cents just after 8am, from 75.69 cents at 5pm. The trade-weighted index decreased to 67.66 from 67.84.

Italy sold 3 billion euros of five-year bonds and while demand was strong, the highest yield since the inception of the euro in 1999 has locked the indebted nation into interest payments some economists deem unsustainable.

The auction result comes amid concern European leaders aren’t treating the sovereign debt crisis with enough urgency, raising the risk of global fallout.

“The sales mean the kiwi is going to struggle to rise and be vulnerable to the downward risks which are dominating,” said Peter Cavanagh, an adviser at Bancorp New Zealand. The sale was received well by investors “but really it depends on your definition of a good sale.”

The auctions come after 26 of the European Union’s 27 members agreed on a so-called fiscal pact last weekend in Brussels, which requires nations to virtually eliminate structural deficits. The pact will result in a tighter control of tax and spending by governments that overstep the bloc’s deficit limit of 3 percent of gross domestic product.

The measures may not be enough to prevent the region from falling back into recession, creating a drag on global growth and weighing on growth-linked assets including the kiwi dollar.

“Growth is just not on anyone’s radar at the moment,” Cavanagh said. “European banks, governments and non-governmental organizations are all revising down there long-term growth projections.”

The euro dropped to an 11-month low versus the US dollar and was recently at US$129.74.

Europe’s Stoxx 600 fell 2.1 percent and has shed 16 percent so far this year. In London, the FTSE 100 ended 2.25 percent lower. In New York, the Dow Jones Industrial Average fell 1.2 percent.

The kiwi declined to 57.88 euro cents from 58.05 yesterday and 58.72 yen from 58.95. It fell to 48.58 British pence from 48.84 pence. It rose to 75.78 Australian cents from 75.48.

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