NZ Dollar falls below 70 US cents on rates outlook

Friday 8th August 2008

The New Zealand dollar falls below 70 U.S. cents for the first time in 11 months amid expectations rising unemployment, signaling a weakening economy, will help convince the central bank to cut interest rates more.

The unemployment rate rose to a two-year high of 3.9% in the second quarter. The rate may reach 4.6% by March 2009, in line with the central bank's latest forecast, according to economists at UBS New Zealand.

The currency fell as low as 69.80 U.S. cents from 71.81 cents yesterday in Asia. It was recently at 70.10 cents. The kiwi has declined from about 82 U.S. cents in March.

A stronger U.S. dollar and "ongoing concerns about a sharp slow-down in the New Zealand economy should ensure bounces in the NZD are limited," said Danica Hampton, currency strategist at Bank of New Zealand. "The risks are skewed in favour of a deeper correction toward 70 cents over coming weeks."

Most economists predict Reserve Bank Governor Alan Bollard will reduce the official cash rate at each opportunity this year from 8% currently. That's likely to sap demand for the kiwi, once a favorite for the carry trade, where investors borrowed funds cheaply in yen to buy high-yielding assets.

Bollard next reviews interest rates on Sept. 11 and has two further reviews scheduled this year on Oct. 23 and Dec. 4.

By Jonathan Underhill

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