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NZ dollar falls to two-month low as Europe's debt fears linger, sap risk appetite

Tuesday 18th May 2010

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The New Zealand dollar fell to a two-month low as fears about Europe’s sovereign credit crisis continue to sap investors’ appetite for riskier, or higher-yielding, assets. Looming debt maturities from Italy and Greece, two of the so-called PIGS, has kept a lid on sentiment about the pace of the global recovery, as investors continued to eschew higher yields in favour of so-called safe havens such as the US dollar and yen.

The Thomson Reuters/Jeffries CRB Index, a broad measure of the price of 19 raw materials, sank 2% with the prospect China might start to cool its economy after Premier Wen Jiabo said the world’s third largest economy would act “decisively” to stave off excessive gains in house prices.

The kiwi dollar fell below 70 US cents for the first time since March as offshore risk aversion offset strong commodity prices and the prospect of looming rate hikes by the central bank. 

“Fears the European sovereign debt crisis could escalate and derail the global economic recovery has seen equity markets plummet, risk appetite dry up, and growth-sensitive currencies sold aggressively,” said Mike Jones, strategist at Bank of New Zealand. “The only thing keeping the kiwi down is the lack of appetite for risk – commodity prices are good and interest rate spreads are generally supportive of the currency.”

The kiwi sank to 67.72 US cents from 70.07 cents yesterday, and dropped to 67.20 on the trade-weighted index of major trading partners’ currencies from 67.65. It fell to 64.47 yen from 64.67 yen yesterday, and declined to 79.49 Australian cents from 79.89 cents. It slipped to 56.35 euro cents from 56.93 cents yesterday, and decreased to 48.18 pence from 48.59 pence.

Jones said the currency may trade between 69.20 US cents and 70.60 cents today, and if it closes the local session below 69.50 cents it will probably test its next level of support at 68 cents.

The European Central Bank moved to help quell fears its bond purchase programme would evolve into quantitative easing, saying it will sterilise 16.5 billion euro of its recent issuances by offering one week term deposits to prevent purchases of government securities from fuelling inflation.

The impact of Europe’s credit crisis on New Zealand may become more apparent in the Reserve Bank’s Financial Stability Report out tomorrow morning, when Governor Alan Bollard gives an update on the country’s financial systems.

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