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Kiwi falls as European debt concerns re-emerge

Monday 16th August 2010

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The New Zealand dollar fell as concerns about the state of Europe’s debt re-emerged, even as the region reported strong second-quarter growth.  

Fears over Europe’s sovereign debt reared their head once more after tepid demand for an Italian government bond auction helped push Greek 10-year bond spreads above German bunds to more than 800 basis points.

Markets are speculating Ireland is struggling with its debt, and investors will put this week’s Irish auction under the microscope. The pessimism came amid a 1% second-quarter gain in the region’s gross domestic product, led by a 2.2% surge from Germany, the biggest quarterly rise since reunification in 1990.  

“The downbeat sentiment was mostly from the resurgent concerns about sovereign debt problems after a pretty poor Italian auction,” said Mike Jones, strategist at Bank of New Zealand.

“The kiwi’s probably going to test the 60s later this week after a fairly subdued start.”  

The kiwi fell to 70.52 US cents from 71.09 cents on Friday in New York, and dropped to 66.12 on the trade-weighted index of major trading partners’ currencies from 66.41. It decreased to 60.77 yen from 60.86 yen last week, and declined to 78.95 Australian cents from 79.16 cents. It slipped to 55.22 euro cents from 55.43 cents on Friday, and retreated to 45.15 pence from 45.54 pence.  

Jones said the currency may trade between 70.30 US cents from 71.20 cents today, and will continue to track equity markets and general market sentiment.  

Tepid US data buoyed the market’s risk aversion, with American consumer spending growing at a weaker-than-expected pace of 0.4% last month, damping investors’ appetite for higher-yielding, or riskier, assets, with the Standard & Poor’s 500 index dropping 0.4%.  

The kiwi fell to a three-month low against the Australian dollar as investors continue to pare back their expectations of the Reserve Bank of New Zealand’s tightening track, while Australia’s central bank is predicted to stay on its current track.

Markets are betting the RBNZ will lift the official cash rate 59 basis points over the coming year, according to the Overnight Index Swap curve, and are pricing in 15 basis points of increases by the RBA.

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