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Dollar heads for weekly decline on global economic downturn

By Paul McBeth

Friday 5th December 2008

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The New Zealand dollar is heading for a weekly decline, having shed 3% so far, as more evidence of the scale of the global slowdown eroded demand for higher-yielding, or riskier assets.

The Eurozone’s gross domestic product shrank 0.2% in the third quarter, slowing its annual pace to 0.6%. Unemployment in the US is expected to reach a 15-year high when the Labor Department releases its payroll report this week. Stock markets in the US, Europe, and Asia declined.

“The US economy has been deteriorating rapidly and this has seen a rise in risk aversion,” said Khoon Goh, senior markets economist at ANZ National Bank. “Moving forward, lower yield differentials means there’s less promotion of the New Zealand dollar.”

The kiwi fell to 53.39 US cents from 54.99 cents at the close of trading last week, and was up from 53.25 cents yesterday. It was rose to 49.51 yen from 49.44 yen yesterday, and fell to 41.74 euro cents from 42.29 cents yesterday.

The gap between the yield on New Zealand 10-year bonds and 10-year US Treasuries has narrowed to 2.27 percentage points. The gap between the official cash rate and the Federal Funds rate narrowed to 4 percentage points from 5.5 points after Governor Alan Bollard cut the OCR by a record amount yesterday.

Goh said the medium-term outlook for the New Zealand dollar is down. It may trade between 53.27 US cents and 54.14 cents today.

Bollard slashed the OCR by 150 basis points to 5% in what has been the steepest series of rate cuts since the benchmark rate’s inception in 1999.

He told a media conference that the New Zealand economy’s recession was technically over, and has been much shallower than expected.

Unlike the central bank’s optimistic prediction, ANZ National Bank’s economic forecast does not see the economy recovering until the middle of next year. Because Bollard was relying on central bank forecasts, he was “technically correct,” Goh said.

The rate cut in New Zealand was one of several aggressive movements this week, and while it may improve investor confidence, Danica Hampton, currency strategist at Bank of New Zealand, said it can also be seen as an indicator of the “dire state of the global economy.”

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