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NZ dollar extends May decline as Spanish downgrade keeps investors nervous

Monday 31st May 2010

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The New Zealand dollar extended its monthly decline after Fitch Ratings downgraded Spain’s sovereign credit rating, keeping investors nervous about the debt crisis plaguing the Euro-zone.  

The kiwi sank 6.8% this month as Europe’s sovereign debt crisis sapped investors’ appetite for higher-yielding, or riskier, assets. Fitch followed Standard & Poor’s lead in April, cutting Spain’s credit rating to AA+ from AAA, saying the “process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium term.” Stocks in Europe and the U.S. continued to fall, with the Dow Jones Industrial Average posting its worst May result since 1940.  

“The big story was Fitch’s downgrade of Spain to AA+, which dragged the euro lower and provided a boost to the U.S. dollar,” said Mike Jones, strategist at Bank of New Zealand. “Appetite for risk remains under pressure and that’s not a supportive environment for the kiwi.” 

The kiwi dropped to 67.75 US cents from 68.31 cents on Friday in New York, and slipped to 65.67 on the trade-weighted index of major trading partners’ currencies from 66.00. It fell to 61.59 yen from 62.28 yen last week, and edged up to 80.12 Australian cents from 79.99 cents. It rose to 55.23 euro cents from 55.04 cents on Friday, and gained to 47.08 pence from 46.85 pence.  

Jones said the currency may trade between 66.80 U.S. cents and 68.50 cents today with more risks to the downside as portfolio managers exit higher-yielding positions with the changing month. Still, a lot or repositioning took place on Friday, with the U.S. and U.K. on holiday today, so market liquidity is expected to be very thin during the London and New York sessions.  

“There’s some risk of more unwinding in the kiwi, and it could be an interesting night for month-end after equities fell 10% on the MSCI World index,” he said.

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