NZ dollar falls as equity markets plunge on Italian concerns

Thursday 10th November 2011

The New Zealand dollar fell more than a US cent as investors spurned risky assets when a spike higher in Italian bond yields triggered a sell-off in US equities.

The kiwi was at 78.22 US cents at 8am, down from 79.48 US cents at 5pm yesterday.

The Dow Jones Industrial Average was down 2.8 percent as the local currency market geared up for a new day dominated by fears that the financial crisis in Europe is spreading.

Italian bond yields shot up to 7.5 percent, a new high, as Prime Minister Silvio Berlusconi's insistence on elections instead of an interim government suggested prolonged instability in Italy, Reuters reported.

"It is all about Italy. To be honest we had been surprised at how well the euro has been holding up against the US dollar,” said Dan Bell senior currency strategist at HiFX. “The bond market had done the job of reflecting uncertainty."

Now the currency market was finally taking a look at Italian bond yields which are unsustainable at current levels because of the country's high debt.

Earlier this week news that Berlusconi will resign stoked investors’ appetite for so-called risk-sensitive currencies. Today Italy was the source of turmoil on world markets.

News yesterday that Consumer prices rose 5.5 percent from a year earlier, the least in five months, in China and industrial production increased 13.2 percent didn’t have much bearing on currency markets.

Traders will be watching today’s Australian employment data at 1.30pm NZ time, which is expected to show the unemployment rate rose to 5.3 percent in October from 5.2 percent in September, according to a Bloomberg survey.

Federal Reserve Ben Bernanke didn’t elaborate on the outlook for the US economy and monetary policy in the prepared remarks to a Fed conference.

The switching focus to Italy comes after Greece’s main political parties came to an agreement earlier this week to form a coalition government to pass its own austerity measures that will let it tap the Euro-zone’s bail-out package.

Former European Central Bank head Lucas Papademos is the front-runner to succeed George Papandreou as Greek Prime Minister.

The kiwi was little changed at higher at 76.99 Australian cents from 76.77 cents yesterday. It rose to 57.65 euro cents from 57.47 cents, and slipped to 49.10 British pence from 49.37 pence yesterday.

The kiwi fell to 60.82 yen from 61.64 yen yesterday and the trade-weighted index declined to 69.01 from 69.42.

BusinessDesk.co.nz

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