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NZ dollar slips below 78 US cts as markets digest central bank coordination

Friday 2nd December 2011

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The New Zealand dollar dipped below 78 US cents as markets digest the coordinated moves by the world’s biggest central banks to cut borrowing costs for European lenders in an effort to contain the region’s debt woes.

The New Zealand dollar was little changed at 77.85 US cents at 8am from 77.83 cents yesterday, after touching 78.01 cents in New York trading.

Markets are still analysing a surprise joint initiative by the US Federal Reserve, the European Central Bank and their counterparts in Canada, Britain, Japan and Switzerland joint agreement to cut interest rates on dollar liquidity swap lines.

The deal bolstered investor confidence but isn’t expected to address the threat of indebtedness from some of Europe’s highly indebted states. That leaves investors waiting until the Dec. 9 European Union leaders’ summit, where it’s expected a plan to deal with the debt threat will be unveiled.

The Spanish government sold 3.75 billion euros of five-year bonds paying a yield of 5.544 percent, the highest since at least 2005, and attracted twice as much demand as what was on offer, while the 3.81 percent yield achieved at an auction of 4.3 billion euros of French 10-year bonds was less than a Nov. 3 sale.

“All the announcement has done is free up the markets for the holiday period, it doesn’t change anything. We are still watching the headlines,” said Stuart Ives, currency strategist at HiFX. “The heat is coming off a bit” which initially helped stoke demand for the kiwi, he said.

The European Central Bank is expected to support banks lowering interest rates next week and announcing longer-term cheap liquidity tenders with easier collateral rules, according to Reuters. Markets are pricing in a quarter point reduction to 1.0 percent on Dec. 8.

The New Zealand Institute of Economic Research said in a report yesterday that Europe’s crisis meant there is now a 25 percent chance that the euro region will be broken up and New Zealand firms should prepare for “another global financial crisis” if it happens.

If the euro zone crisis plays out badly with a break-up of the euro, “New Zealand would likely experience another recession and the Reserve Bank would need to cut interest rates,” the institute said.

There is no local data set for release today.

The kiwi fell to 57.76 euro cents from 57.86 cents yesterday and was at 49.57 British pence from 49.59 pence. It dropped to 76.03 Australian cents from 76.13 and little changed at 60.43 yen from 60.46 yesterday.

The trade weighted index was little changed at 68.73 from 68.81 yesterday.

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