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NZ dollar falls to 4-week low as tepid European growth and rising bond yields dent sentiment

Wednesday 16th November 2011

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The New Zealand dollar fell to a four-week low as rising government bond yields and tepid growth in Europe clouded the outlook for the global economy. The kiwi sank to a six-month low against the Australian dollar on the appeal of that nation’s relatively high interest rates.

The kiwi dollar was at 77.07 US cents just before 8am, down from 77.46 cents at 5pm yesterday. It fell to 75.63 Australian cents, the lowest since May 24, from 75.92 cents.

The yield in Italian 10 year bonds rose 7.04 percent while Spain's climbed to 6.28 percent, in a sign that investors are becoming more averse to risk in Europe while European Union figures showed the region’s gross domestic product grew 0.2 percent, unchanged from the second quarter.

Europe’s woes are continuing to weigh on the New Zealand economy, said Alex Sinton senior dealer at ANZ New Zealand. The kiwi dollar is under pressure versus its Australian counterpart given that nation’s relative economic outperformance and higher interest rates, which mean “investable dollars heading their way not ours.”

The New Zealand dollar weakened against the Australian dollar after minutes of the Reserve Bank of Australia’s latest policy meeting, released yesterday, show the central bank was unlikely to cut its benchmark interest rate again any time soon. It cut the target rate a quarter point to 4.5 percent this month, narrowing the gap with New Zealand’s 2.5 percent official cash rate.

New Zealand’s election on Nov. 26 – in 10 days time – is also starting to reverberate in currency markets, Sinton said. While the National Party is the clear favourite, “we can't put that 100 percent weighting on economic conditions.”

Helping limit the kiwi dollar’s decline, prices of dairy products in Fonterra Cooperative Group’s latest auction rose 2.6 percent, the biggest gain since early June. Dairy products are New Zealand’s biggest export.

The Kiwi dollar was little changed against at 56.87 euro cents from 56.88 cents yesterday and fell to 48.66 British pence from 48.73. The trade weighted index was at 75.62, down from 68.17.

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