Dollar gains as global outlook boosts appetite for risk

Monday 22nd June 2009

The New Zealand dollar gained as optimism the global economy is on the mend stoked investor appetite for higher-yielding, or riskier, assets.

The Chicago Board Options Exchange’s volatility index, or VIX, which measures volatility in the Standard & Poor’s 500 index, fell 7% to 27.79 after better-than-expected US data last week stoked optimism the recession in the world’s largest economy may be abating.

The Federal Open Market Committee will review its benchmark interest rate on Thursday, and traders will be looking to see if it’s preparing an exit strategy from its quantitative easing programme. Finance ministers at a Group of Eight summit earlier this month were upbeat in their appraisal of the global economy, and some openly discussed unwinding their extraordinary fiscal and monetary policies.

The kiwi “finished last week relatively firmer” on renewed optimism the global recession may have troughed, said Danica Hampton, currency strategist at Bank of New Zealand. “The Fed’s review is the main event this week – if it reiterates low rates for some time, it could show those pricing in rate hikes this year got over-excited” and put the greenback under pressure, she said.

The New Zealand dollar rose to 64.26 US cents from 64.04 cents last week, and increased to 60.76 on the trade-weighted index, or TWI, a measure of the currency against its major trading partners. It declined to 61.81 yen from 62.12 yen last week, and advanced to 79.78 Australian cents from 79.51 cents. It was little changed at 46.05 euro cents from 46.03 cents last week.

Hampton said the currency may trade between 63.50 US cents and 65 cents today with upwards pressure on interest rates continuing to support a stronger currency. The two-year swap rate increased 20 basis points to 3.95%.

“Paying from domestic mortgage books is expected to keep NZ swap rates underpinned again this week,” she said.

European Union leaders said there was a “clear need for a reliable and credible exit strategy” at a meeting on the weekend, but European Central Bank member Jose Manuel Gonzalez-Paramo said it was too early to start introducing any measures.

The state of the Euro-zone will become more apparent today when Germany’s IFO business climate index is released, and gives an update on business confidence in the world’s fourth-largest economy.

Businesswire.co.nz

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