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Dollar tumbles amid disappointing US, German data

Wednesday 24th February 2010

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The New Zealand dollar tumbled amid disappointing data releases in the US and Germany, which sapped investors’ optimism about the pace of the global recovery and discouraged them from seeking out higher-yielding, or riskier, assets.  

The German IFO survey fell short of expectations, underpinning fears that Europe’s largest economy is beginning to stagnate, while American consumer confidence sagged to a 10-year low house prices fell more than expected in the three months through December.

The soft data damped investor appetite for higher yields and sent them flocking to the US dollar by default, with the Dollar Index, which measures the greenback against a basket of six currencies, rising 0.9% to 80.83.

Traders will likely remain wary until Federal Reserve Chairman Ben Bernanke testifies before the Senate and gives his appraisal of the health of the world’s largest economy.  

“A lot of people are starting to get very nervous about the global recovery,” said Khoon Goh, senior markets economist at ANZ National Bank. “There was an aggressive sell-off in risk assets across the board which saw the kiwi and the Aussie get run over,” he said referring to the trans-Tasman currencies colloquially.  

The kiwi sank to 69.17 US cents from 70.51 cents yesterday, and dropped to 64.32 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 65.14. It declined to 62.28 yen from 64.02 yen yesterday, and slipped to 77.70 Australian cents from 77.77 cents. It fell to 51.18 euro cents from 51.49 cents yesterday, and decreased to 44.80 pence from 45.33 pence.  

Goh said the currency may trade between 68.98 US cents and 69.64 cents today with investors likely to avoid riskier assets until Bernanke gives his speech.  

The Reserve Bank of New Zealand’s survey of expectations didn’t move the currency much when it was released yesterday. The data showed two-year inflation expectations edged up to 2.65% from 2.61% in the previous quarter.  

The kiwi dollar continued its decline against the Australian dollar after Reserve Bank of Australia Deputy Governor Ric Battellino gave an upbeat assessment of the so-called ‘lucky country’, further accentuating the divergence between the trans-Tasman economies.

Goh said he “wouldn’t be surprised if the kiwi goes all the way to 75 Australian cents” with the clear difference in monetary policy settings, though it will face strong resistance having not been below 77 cents since December 2000.

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