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Dollar may fall as weaker stocks add pressure for rate cuts

By Paul McBeth

Thursday 20th November 2008

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The New Zealand dollar may fall as weaker global share-markets put pressure on central banks to further cut interest rates to combat the deepening worldwide financial crisis.

Stocks fell in the US amid further signs the world's largest economy is lurching toward a deep recession. The inflation rate fell 1% in October, taking the annual consumer price index to 2.2% from 2.5%, while construction on housing fell 4.5% as new building permits dropped to its lowest level since 1960. Concern about delays to an auto industry bailout helped push the Standard & Poor's 500 Index down 2.8%. Stocks tumbled in Europe with the FTSE 100 falling 4.8%.

"The fact that equities are still softening means we will see some pressure" on the New Zealand dollar, said Mike Symonds, head of sales and foreign exchange at Bank of New Zealand. "We're likely to see risks of more aggressive Reserve Bank cuts."

After a volatile night which saw the kiwi move three-quarters of a cent, it recently traded at 54.88 U.S. cents from 54.79 cents yesterday. It fell to 52.85 yen from 52.93 yen. It fell to 84.76 Australian cents from 84.99 cents.

Symonds said the kiwi will likely trade between 54.50 US cents and 55.20 cents today.

The chief executives of the three major US car companies, Ford Motor Corp., Chrysler LLC, and General Motors Corp., will be questioned by the House Financial Services Committee on how they will adapt their business models if they receive the US$25 billion bailout package.

While Ford is confident it can survive the year without an injection of cash, GM has reported it does not have the reserves to cope with the current global environment.

The glut of weak economic data coming from the US points to it facing its deepest recession in 25 years.

In New Zealand, central bank Governor Alan Bollard is expected to extend his steepest series of cuts to the official cash rate (OCR)since its introduction in 1999. Some economists say the OCR will go as low as 4% next year.

Economists are predicting Bollard will cut the OCR by a further 100 basis points in December to 5.5%.

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