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Dollar drops below 69 US cents as Bollard flags euro woes

Wednesday 19th May 2010

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The New Zealand dollar dropped below 69 US cents for the first time since early March after Reserve Bank Governor Alan Bollard flagged the risks of contagion from Europe’s debt crisis and reiterated his view that a low kiwi was desirable.

Bollard told journalists in Wellington after the release of the bank’s Financial Stability Report that New Zealand “could be vulnerable to any renewed deterioration in global debt markets” and the sovereign debt crisis in Europe may provoke “further turbulence if adequate progress is not made.”

The kiwi dollar has weakened in the face of falling commodity prices and increased risk aversion stemming from Europe. A gradual depreciation of the New Zealand dollar “remains desirable for a sustainable rebalancing of the New Zealand economy,” the report said.

Stocks on Wall Street fell overnight, with the Standard & Poor’s 500 Index sliding 1.4% amid concern the global economic recovery could be undermined. The euro sank to a new four-year low after Germany banned naked short selling of shares in that nation’s biggest financial firms, stoking concern it will encourage traders to bet against the regional currency.

“Bollard raised the risk New Zealand could see some fallout from Europe – the kiwi was already fragile,” said Mike Jones, currency strategist at Bank of New Zealand. After the central bank’s comments of a lower kiwi being desirable, “the immediate reaction was to sell.”

The New Zealand dollar recently traded at 68.99 US cents, from 69.56 cents late yesterday. It strengthened to 79.95 Australian cents from79.74 cents, and earlier climbed above 80 Australian cents.

The local currency weakened to 63.34 yen from 64.27 yen and traded at 56.62 against the euro from 56.40. The trade-weighted index, or TWI, fell to 67 from 67.21.

Jones said the next test for the kiwi dollar will be 68.50 US cents, a key support level, while the top of its range today may be capped at 69.60 cents.

The euro fell as low as $1.216 against the greenback, a new four-year low, after Germany said it will temporarily ban naked short selling and naked credit-default swaps, which have been blamed for worsening the region’s debt crisis.

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