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NZ dollar rises as ratings agencies comfortable with Budget


Thursday 19th May 2011

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The New Zealand dollar rose after the Government's budget was released and bond yields fell mostly because credit rating companies expressed comfort with the document while leaving ratings unchanged.

The Government released a cautious election year budget that returned the operating balance to surplus a year earlier and predicted a reasonable but not spectacular economic growth. Its bond tender programme reduced mostly because it has raised $5 billion more than it needed in the current financial year.

The NZ dollar rose to US79.36c from US78.95c before the budget was released and settled at US79.20c at 5pm. It was at US78.83c at 8am which was similar to its level at 5pm yesterday.

"The currency moved on the S&P comments after the budget," said Imre Speizer, a senior market strategist at Westpac said.

But the rating agency's comments on the possibility of a downgrade if the external position did not improve caused some caution when the market took time to ponder the full statement.

Mr Speizer expected offshore markets to also push the NZ dollar up in a knee-jerk reaction but there was an ongoing risk of a rating downgrade.

ASB said the budget was not just about avoiding black marks from credit rating agencies.

"It is also about reducing New Zealand's collective vulnerability. The challenge of recovering from the recession has been compounded by the earthquakes, and the Government's position reflects the knock backs. It will be a long time until the Crown accounts are as strong as they were in 2007," ASB said.

Bond yields fell as investors reacted to the containment of the fiscal blowout. Ten year government bond yields fell about six basis points to 5.12 percent.

The NZ dollar was little changed at 0.5538 euro from 0.5536 euro at 8am and 0.5522 at 5pm yesterday.

The euro fell against the US dollar as minutes from last month's United States central bank meeting raised expectations that inflation could spur an interest rate hike sooner than expected.

Some Federal Reserve policymakers said they saw a rise in inflation risks, suggesting the Fed might need to tighten monetary policy sooner than currently anticipated.

The NZ dollar was at A74.26c at 5pm from A74.21c at 8am and A74.04c at 5pm yesterday.

It was at 64.57 yen from 63.97 yen yesterday.

The trade weighted index was 68.57 from 68.24 yesterday.

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