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Dollar slides as US stocks fall

By Paul McBeth

Wednesday 19th November 2008

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The New Zealand dollar fell as US stocks fell on a record slump in homebuilder confidence and growing fears banks will report more losses, prompting investors to trim holdings of riskier investments.

Signs that the US housing recession is continuing unabated helped drive the Standard & Poor’s 500 Index down 1.3% and the Dow Jones Industrial Average slid 0.6% to 8222.20, bringing its two-month slide to 27%. Weakening US stocks have reduced investors’ appetite for higher-yielding assets, such as fixed-income securities denominated in the New Zealand dollar.

The New Zealand dollar “is being driven by equity markets,” said Philip Borkin, economist at ANZ National Bank. Volatility in share markets is “not good for New Zealand, or its currency.”

The kiwi fell to 54.88 US cents from 54.93 cents yesterday, and rose to 52.96 yen from 52.87 yen. It slid to 84.57 Australian cents from 85.08 cents yesterday.

Borkin said the kiwi may trade between 54.50 US cents and 56 cents today and end the year at about 58 cents. ANZ National predicts the New Zealand dollar will weaken to 49 US cents by the end of 2009.

Prices paid to US producers had a record slump in October as weakening world economic growth sapped demand for raw materials, adding to signs that the world’s biggest economy is sinking into recession. Borkin said the decline in producer prices may signal global inflation is abating, giving central banks more scope to extend its interest rate cuts.

In the UK, the inflation rate fell more than expected to 4.5% last month, giving the Bank of England greater capacity to reduce interest rates to revive an economy in recession.

In July, New Zealand Reserve Bank Governor Alan Bollard embarked on the steepest series of cuts to the official cash rate since it was introduced in 1999, and economists are forecasting he will cut the OCR by a further 100 basis points in December to 5.5%.

In Australia, the central bank said its decision to slash interest rates was to move “quickly to a neutral position,” according to the minutes of its November meeting.

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