Dollar gains as investors eschew greenback

Monday 14th September 2009

The New Zealand dollar pushed higher as investors eschewed the greenback amid reports Asian central banks are seeking to diversify their assets on concern US inflation may revive, weighing on the world’s reserve currency.

The Dollar Index, a measure of the greenback versus a basket of six currencies, held near a 12-month low 76.67. David Dollar, the US Treasury's economic and financial emissary to China said on Friday that China “has a huge amount of reserves and it makes some sense to diversify what you put these reserves (into)."

He made the comments at a meeting of the World Economic Forum in the northeast Chinese city of Dalian. Foreign central banks are concerned the US Federal Reserve’s extraordinary measures will stoke inflation and erode the value of the greenback.

“Since the Fed embarked on its quantitative easing programme (in March), the greenback doesn’t have many friends in the FX world,” said Khoon Goh, senior markets economist at ANZ National Bank. The kiwi “will largely depend on how the US dollar performs this week – if it continues to look weak the kiwi will grind higher.”

The kiwi climbed to 70.68 US cents from 70.35 cents last week, and rose to 64.39 on the trade-weighted index, or TWI, a measure of the currency versus the Australian dollar, greenback, euro, yen and pound, from 64.17. It slipped to 63.83 yen from 63.95 yen last week, and edged up to 48.37 euro cents from 48.21 cents.

Goh said the currency may trade between 70.20 US cents and 71.20 cents today, with 71 cents likely to be a strong technical level that analysts and traders will be watching.

Gold, which is often used by investors to hedge against inflation, rose 1% to an 18-month high US$1,006.40 per ounce on the New York Mercantile Exchange. China, the world’s largest gold producer, has reportedly been stockpiling the precious metal.

Government data will probably show retail sales in July climbed 0.5% from the previous month, according to a Reuters survey, as New Zealand’s economy continues to show signs of recovery. The kiwi dollar advanced to 81.78 Australian cents from 81.45 cents last week.

Still, it may not hold those gains, given the Australian economy avoided a recession and is outperforming New Zealand’s.

“There’s clear divergence in the respective economies and central banks” which should see the kiwi dollar fall against its trans-Tasman counterpart, Goh said. “The Reserve Bank of Australia has moved to neutral and has pointed to pushing rates higher, while the Reserve Bank here was very clear that it will keep rates low, or even head lower until late next year.”

Central bank Governor Alan Bollard held the official cash rate at a record-low 2.5% last week and reiterated that rates will remain low until the latter half of next year. The 90-day bank bill is forecast to stay at 2.8% until the September quarter next year, according to Reserve Bank forecasts.

Businesswire.co.nz

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