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Dollar likely to hold above 70 US cents as risk appetite fades

Friday 29th January 2010

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The New Zealand dollar will likely hold above 70 U.S. cents today as traders buy on dips after risk appetite faded amid concerns over European sovereign solvency and ongoing problems in Greece.  

Portugal faces a risk of a credit rating downgrade after Moody’s Investors Service said it requires a “credible plan” over its fiscal deficit, while Standard & Poor’s said the British banking system is no longer the most stable in the world. Greece’s fiscal problems continued after it said it hasn’t struck a deal to sell bonds to Chinese investors and will stick to European buyers, while Germany and France knocked back reports they were planning to bail out the Mediterranean nation.

Investors eschewed higher yields amid the grim outlook for Europe, though the trans-Tasman currencies were better supported than the euro and pound.  

“Risk appetite was hit pretty hard by a slew of headlines around Europe,” said Mike Jones, strategist at Bank of New Zealand. “The kiwi and the Aussie are well insulated and are finding good support” around their current levels, he said, referring to the Australian and New Zealand dollars colloquially.  

The kiwi dropped to 70.46 U.S. cents from 71.21 cents yesterday, and declined to 64.64 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 65.12. It slipped to 63.32 yen from 63.37 yen yesterday, and declined to 78.69 Australian cents from 78.87 cents. It decreased to 50.44 euro cents from 50.72 cents, and was little changed at 43.71 pence from 43.75 pence.  

Jones said the currency may trade between 70.20 U.S. cents and 71.40 cents today as investors remain subdued about risky assets, though he said “any dips below 70 will be bought.”  

Reserve Bank Governor Alan Bollard will deliver a speech in Christchurch today entitled “The crisis and monetary policy: what we learned and where we are going.”

Jones said Bollard probably won’t make any bold statements, though any hint as to where monetary policy is going.

Bollard kept the official cash rate on hold at 2.5% yesterday, as expected, though his language was more upbeat in the statement. 

The number of new building consents issued in December may sway the kiwi to the downside if it throws up a surprisingly weak number after Real Estate Institute data earlier this month showed the housing market wasn’t reviving as quickly as previously thought, Jones said.

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