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Dollar tumbles as resurgent EU sovereign risk fears sap risk appetite

Wednesday 5th May 2010

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The New Zealand dollar tumbled about 1 US cent and weakened against the yen as renewed fears of spreading contagion from Greece's fiscal woes drove down stocks and commodity prices and eroded investors' risk appetite. 

The US$144 billion aid package for Greece may not be enough as Spanish Prime Minister Jose Luis Rodriguez Zapatero was forced to deny his country is next in line to need a bailout and traders speculated that Portugal is in the same camp.  

The euro region has been divided on its response to the fiscal debt crisis in Greece, with Germany urging the region to allow an "orderly" default of weakened member states.

Stocks tumbled in Europe, with Spain's IBEX 35 index sinking 5.4% and France's CAC 40 sinking 3.6%, while on Wall Street, the Standard & Poor's 500 Index declined 2.4%. 

"The theme is 'risk out'," said Tim Kelleher, vice president of institutional banking and markets at Commonwealth bank of Australia.

The impact in currency markets was exacerbated when London returned after a long weekend and as rumours swelled that Spain needs a Euro package, he said. 

The New Zealand dollar fell to 71.99 US cents, from 72.98 cents yesterday. The trade-weighted index, or TWI, slipped to 67.98 from 68.28 as the kiwi gained against the Australian dollar and the euro, helping limits the impact of the slide against the greenback and the yen. 

The kiwi dollar rose to 79.21 Australian cents from 78.86 cents yesterday and advanced to 55.43 against the euro from 55.20. It tumbled to 68.06 yen from 69.20 yen. 

The euro fell below US$1.30 for the first time in more than a year amid speculation the aid package for Greece won't prevent other countries succumbing to a debt crisis. 

Kelleher says the New Zealand dollar may trade in a range of 71.75 US cents to 72.25 cents today, holding with its recent trading band.

"Sentiment will be negative because of what happened overnight." 

The kiwi didn't move much after Fonterra Cooperative Group posted the results of its latest online milk powder auction, showing prices held most of last month's gains.  

The local currency advanced against the Australian dollar after the Reserve Bank of Australia raised its benchmark interest rate to 4.5% but signaled borrowing costs are now about neutral, meaning there's less need for further hikes. 

"The tone of the accompanying statement came as a disappointment to those looking for the RBA to keep ramping up rates in coming months," said Mike Jones, currency strategist at Bank of New Zealand, in his morning note.

"Rather, it looks as if the RBA may take stock for a while and assess the economic landscape, content it has now returned rates to around average levels". 

With the RBA on a milder track and New Zealand's central bank signaling rate hikes are looming, "we suspect we have indeed seen the bottom in NZD/AUD for now." 

Also weighing on the Australian dollar is continued fallout from the federal government's announcement of a super tax on mining profits, which has driven down shares of resource companies and triggered concern that it will hamper investment in the sector.

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