Dollar falls to three-week low on weak US outlook

Thursday 12th August 2010

The New Zealand dollar dropped to a three-week low as stocks on Wall Street plunged in response to the Federal Reserve's dim outlook for the American economy rattled investors' nerves.

The Standard & Poor's 500 index fell 2.8% as investors shunned higher yielding, or riskier, assets after the Fed's downbeat view weighed on sentiment amid weaker US trade data.

Wall Street's ‘fear gauge', the Chicago Board Options Exchange's VIX index, climbed 14% to a three-week high of 25.39 as traders went back to so-called safe havens like the greenback and yen.

Chinese industrial production, retail sales and inflation data came in close to expectations, and did nothing to inspire confidence among investors.

"The deeper digestion of what the Fed said about the economy being more fragile than they thought battered already shocking sentiment," said Imre Speizer, markets strategist at Westpac.

"The reversal weighed on the kiwi, and I'm seeing it going to 70 US cents initially, and it could be in for a deeper correction."

The kiwi edged down to 71.58 US cents from 71.61 cents yesterday, and gained to 66.75 on the trade-weighted index of major trading partners' currencies from 66.45. It rose to 61.09 yen from 60.88 yen yesterday, and increased to 79.67 Australian cents from 79.33 cents. It advanced to 55.61 euro cents from 54.93 cents yesterday, and was little changed at 45.69 pence from 45.63 pence.

Speizer said the currency may trade between 71 US cents and 72.50 cents after heavy selling yesterday, and may be in for an intra-day bounce. Still, he predicts it will test 70 cents in the coming week.

Australian labour data today is expected to show more jobs growth across the Tasman, with economists predicting an increase of 20,000 last month, and to be the main risk event today for the kiwi dollar.

Bank of England Governor Mervyn King pared back his economic forecasts for the UK and lifted his expectations for inflation in the central bank's quarterly inflation and growth report.

In his speech, he indicated the bank has a bias towards more quantitative easing, though he expects inflation will stay below his 2% target over the next two years.

Businesswire.co.nz

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