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NZ dollar falls amid prospects for deeper RBNZ cuts

-By Paul McBeth

Wednesday 8th October 2008

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The New Zealand dollar fell below 63 U.S. cents for a second day on speculation the central bank will follow Australia's lead and cut the official cash rate by 100 basis points.

The Reserve Bank of Australia yesterday cut its benchmark rate twice as much as expected to 6% to help shield that economy from the impact of a widening global credit squeeze. Ben Bernanke, chairman of the Federal Reserve signalled that American policy makers are prepared to cut interest rates as the global crisis deepens.

"It's a reasonable expectation that the Reserve Bank will follow Australia," with a 100 basis point cut, said Michael Gordon, markets economist at Westpac. "We can't rule out an early move either."

The New Zealand dollar fell to 62.41 U.S. cents from 63.48 cents yesterday, tracking declines in the Australian dollar which dropped to 70.72 U.S. cents from 71.95 cents. The kiwi rose to 88.21 Australian cents from 86.50 cents.

The rate cut by the RBA yesterday has raised the risk of New Zealand's central bank taking more aggressive action, with Bank of New Zealand economists rating the odds of a 75 point basis cut as 50:50. Danica Hampton, currency strategist at BNZ, said they are "more convinced than ever that the OCR is headed for 5.50%."

The global economy is headed for a "major downturn" next year, the International Monetary Fund said in report prepared for a G-7 meeting. The IMF predicted U.S. economic growth would slow to just 0.1%.

Iceland yesterday took control of its second-largest lender while in the U.K., banks met to consider emergency lending measures.

In New Zealand, a survey yesterday suggested the nation's recession may become more protracted. The New Zealand Institute of Economic Research said indicators of domestic trading activity in its latest survey suggest gross domestic product shrank in the third quarter and is likely to contract in the fourth quarter as well.


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