NZ Dollar rebounds after US plan for mortgage financiers

Monday 8th September 2008

The New Zealand dollar rebounded from a two-year low after the U.S. government stepped in to rescue mortgage giants Fannie Mae and Freddie Mac, restoring investor appetite for higher-yielding assets.

The kiwi recently traded at 67.70 U.S. cents from as low as 66.60 cents on Friday. Earlier it rose as high as 68.46 cents.

The U.S. Treasury's announcement "was seen as supportive for the U.S. financial sector and this triggered a widespread buying back of short yen cross positions," said Danica Hampton, currency strategist at Bank of New Zealand.

Investors chasing higher yields can borrow cheaply in yen to invest in currencies such as the New Zealand dollar, known as the carry trade. The kiwi strengthened to 73.90 yen from 73 yen.

The U.S. government stepped in to rescue Fannie Mae and Freddie Mac after a surge in mortgage defaults that risked collapsing the lenders that make up about half the U.S. home-loan market. The Federal Housing Finance Agency will act as 'conservator' of the organizations until they can be put back on a secure footing.

Meantime, economists expect the Reserve Bank of New Zealand this week will lower its official cash rate a quarter point to 7.75%, its second reduction since July, to stoke growth in an economy that shrank in the first half, according to Treasury's estimate.

New Zealand's 8% official cash rate is one of the highest benchmark interest rates worldwide for a country with the highest credit rating at Moody's Investors Service.

By Jonathan Underhill

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