Dollar gains as stocks rise

By Paul McBeth

Friday 31st October 2008

The New Zealand rose after US shares rallied on a smaller than expected contraction in the US economy and prospects of further central bank rate cuts worldwide.

The US economy shrank by 0.3% in the third quarter, less than the 0.5% predicted by economists, nudging stocks on Wall Street higher and helping the US dollar gain against the yen. New Zealand�s dollar also gained on the yen as rising stocks encouraged risk appetite.

The kiwi rose to 59.31 US cents from 58.93 cents yesterday, and increased to 58.47 yen from 57.91. It fell to 87 Australian cents from 87.28. Gains in the New Zealand dollar may be limited by month-end demand for US dollars in Europe said Danica Hampton, currency strategist at Bank of New Zealand.

�A solid performance from global equity markets and recovering risk appetite should provide some support for the New Zealand dollar,� Hampton said. �However, lingering fears about a global recession and month-end demand for US dollars should ensure bounces are limited.�

In New Zealand, the National Bank business confidence survey yesterday posted its sharpest monthly decline on record, with 42% of respondents expecting business conditions to worsen. Government figures yesterday showed a weakening trend in building consents.

The economy fell into recession in the first half of the year, and some economists predict the contraction will extend through to the end of the year.

The kiwi dollar has fallen 21% since July, when the central bank embarked on its steep easing cycle since the official cash rate was introduced in 1999. The Federal Reserve this week cut its target rate 50 basis points to 1% and Hong Kong yesterday reduced its rate by 50 basis points to 1.5%. The Bank of Japan may lower its benchmark interest rate as soon as today.

Fund managers will tonight unwind positions in other currencies to buy US dollars at month-end, said Tim Kelleher, corporate risk manager at ASB. �Anywhere between 10 and 50 billion euro� will be sold for US dollars, he said.

He predicts the kiwi will trade between 58 and 59.50 US cents today and may rise to as high as 68 US cents next month.

BusinessWire.co.nz

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