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Dollar climbs from 10-month low as Fed talks down contagion threat

Wednesday 26th May 2010

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The New Zealand dollar climbed from a 10-month low after St Louis Federal Reserve President James Bullard talked down the threat of Europe’s debt crisis seeping across the Atlantic, and helped ease investors’ concerns about the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain).  

Bullard told an audience in London that the Fed was watching Europe’s woes very carefully, but said he didn’t think it would significantly impact on US monetary policy. That helped allay earlier concerns over the state of Spain’s banks after the International Monetary Fund said the nation faces “severe” challenges, and the ongoing nervousness pushed bank funding costs up, with the three-month London Interbank Offered Rate up 5.2% to 54 basis points.

The kiwi dollar sank below 66 US cents for the first time since August last year amid the early jitters before paring its losses as Bullard’s speech and upbeat US data helped markets regain some confidence.  

“The news driving things at the moment is nothing new – we’re not any worse than what we’ve already seen,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia.

“The kiwi looks ready to rally back for the next two or three days as it goes through some consolidation.”  

The kiwi rose to 66.90 US cents from 65.79 cents yesterday, and gained to 65.16 on the trade-weighted index of major trading partners’ currencies from 64.54. It rose to 60.34 yen from 59.02 yen yesterday, and slipped to 80.93 Australian cents from 81.27 cents. It increased to 54.20 euro cents from 53.94 cents yesterday, and advanced to 46.45 pence from 46.06 pence.  

Kelleher said the currency may trade between 66.75 US cents and 67.50 cents today and will head towards 68.50 cents in the coming week as it rallies off its low.  

“The kiwi’s well-supported off 66.50 US cents and those who didn’t get in down there missed out,” Kelleher said.  

The New Zealand dollar gained some traction yesterday when Fonterra Cooperative Group announced an increased forecast pay-out to farmers for the 2010/11 season, and Kelleher expects the announcement will cement a June rate hike by the Reserve Bank of New Zealand.  

Investors are betting the RBNZ will hike the official cash rate by 144 basis points in the next 12 months, according to the Overnight Index Swap curve, though that expectation has been declining since May 6 when they were predicting 215 basis points of increases.

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