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NZ dollar sinks to five year low on less carry trade demand

Thursday 9th October 2008

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The New Zealand dollar plunged to a five-year low, trading below 58 U.S. cents, and weakened against the yen as investors exited holdings of high yielding currencies funded with loans in Japan.

The kiwi dollar fell as six central banks cut their benchmark rates overnight in a coordinated bid to ease the economic effects of the worst financial crisis since the Great Depression. The Nikkei 225 slumped 9.4% yesterday, its biggest drop since 1987 while Germany's DAX fell 5.9%.

"The kiwi and Australian were under attack after the markets closed," said Tim Kelleher, corporate risk manager at ASB. "Investors are getting out of the carry trade."

The New Zealand dollar fell as low as 57.75 U.S. cents, and recently traded at 60.55 cents, from 62.47 cents late yesterday. The kiwi fell to 60.44 yen from 63.30, earlier sinking as low as 57.85 yen. The Australian dollar fell to 66.66 U.S. cents from 71.15 cents, and declined to 66.48 yen from 71.61.

The Australasian currencies pared their declines as some exporters bought them at lower levels to lock in favourable rates to bring home their overseas revenue, said Kelleher.

Falling commodity prices and slowing global growth have left the kiwi currency vulnerable, said Shamubeel Eaqub, economist a Goldman Sachs JBWere.

He predicts the Reserve Bank of New Zealand will follow the message delivered by other central banks, and cut the official cash rate by 100 basis points on Oct. 23, which will lower the value of the kiwi. The rate cut would also correct the "glaringly mis-priced" cross rate between the New Zealand and Australian dollars.

The New Zealand dollar rose to 90.52 Australian cents, from as low as 85.14 cents at the start of the month, boosted by the Australian central bank's decision to cut its target rate a greater than expected 100 basis points.

Danica Hampton, currency strategist at Bank of New Zealand, said some traders have speculated that Governor Alan Bollard won't wait until the next official review of monetary policy to reduce rates. The coordinated cut in rates by central banks overnight "raises the risk of such a move," she said.

Paul MacBeth,

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