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Dollar rebounds as global stock markets rally

By Paul McBeth

Wednesday 29th October 2008

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The New Zealand dollar rose from a seven-year low against the yen and a five-year low versus the dollar after stocks rallied worldwide, lifting demand for higher-yielding, or riskier investments funded with loans in Japan’s currency.

Helping lift sentiment for stocks is the prospect of further interest rate cuts from the Federal Reserve, European Central Bank and Bank of Japan. The Nikkei 225 Index jumped 6.4% while the DAX 30 climbed 11%. In the US the Dow Jones Industrial Average has jumped up 11%. The Fed has embarked on a two-day meeting to review rates and the BOJ is to make a decision on Friday. The ECB is expected to cut its benchmark rate next month.

“The Federal Reserve is the one to watch” because it will increase investors’ appetite for risk, said Philip Borkin, economist at ANZ National Bank. “The markets are talking of a 50 to 75 basis point cut” at the Fed, Borkin said.

The kiwi dollar rose to 55.91 US cents from 54.93 cents yesterday, and jumped to 54.81 yen from 51.98 yen. It weakened against the Australian dollar, which Borkin said is performing better than the kiwi when risk aversion declines, falling to 87.76 cents from 89.31. The US dollar rose to 97.45 yen from 94.61 yesterday.

The currency may get a lift today with the release of merchandise trade figures, which are expected to show the nation’s trade deficit narrowed to NZ$550 million in September from NZ$750 million in the previous month.

The New Zealand dollar will probably get a short-term lift if the Fed cut lifts investor sentiment and equity markets rally, though the long-term trend for the kiwi is still down. Kevin Edgeley, a technical analyst at Goldman Sachs in London, predicted the kiwi dollar will sink as much as 28%, to as low as 39 US cents.

Danica Hampton, currency strategist at Bank of New Zealand, said fears of a “global recession will continue to plague financial markets” and she expects continuing support for the US dollar and the yen, even after the Dow posted its second-best point gain ever as lower stock prices lured investors back to equities.

Borkin predicts the dollar will trade between 54.50 and 56.50 US cents and 51.60 and 56 yen.

BuisnessWire.co.nz

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