Dollar holds below 71 US cents as investors get jitters from policy makers

Wednesday 27th January 2010

The New Zealand dollar held below 71 U.S. cents as investors were given the jitters by policy makers in the U.S. and China looking to put a freeze on non-military spending and reining in credit respectively.

U.S. President Barack Obama is expected to call for a partial, three-year freeze on spending which he says will save the world’s largest economy some US$250 billion. Though the bond market reacted positively on the prospect of a clamp-down on debt, uncertainty over the state of the U.S. economy has made investors nervous.

Meanwhile, the People’s Bank of China has told lenders its higher reserve ratio requirements must be effective from Tuesday and credit rating agency Standard & Poor’s put Japan’s AA sovereign rating on a negative outlook due the country’s rising debt, which sapped investors’ sentiment for Asian equities yesterday.

“There are a lot of things that have investors worried,” said Khoon Goh, senior markets economist at ANZ National Bank. “The kiwi’s trading off global equity movements, and the downward moves came off the back of weak Asian equities yesterday.”

The kiwi rose to 70.94 U.S. cents from 70.71 cents yesterday, and edged up to 64.77 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 64.68. It slipped to 63.60 yen from 63.67 yen yesterday, and declined to 78.70 Australian cents from 78.91 cents. It increased to 50.35 euro cents from 50.20 cents yesterday, and climbed to 43.93 pence from 43.55 pence.

Goh said the currency may trade between 70.15 U.S. cents and 71.05 cents today, with Australian Consumer Price Index data this afternoon likely to be the big event for the kiwi.

Economists expect the headline CPI figure to rise 0.4% in the three months through December, with core inflation accelerating 0.6%.

ANZ National economists predict the Reserve Bank of Australia will hike its benchmark interest rate 25 basis points when it meets next week, and Goh said it would take particularly soft inflation data for the central bank to stay on hold. If the RBA hikes, “that should see the Aussie outperform the New Zealand dollar and hopefully get the cross lower to help our exporters,” he said.

New Zealand’s central bank will review the official cash rate tomorrow, and Governor Alan Bollard is expected to keep rates on hold at a record-low 2.5% after CPI data last week showed there weren’t any inflationary pressures in the economy.

Businesswire.co.nz

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