Dollar gains as more questions raised over greenback's status

Tuesday 7th July 2009

The New Zealand dollar gained as more questions were raised about the status of the greenback as the world’s reserve currency ahead of the Group of Eight summit in Italy this week, stoking demand for higher yields in relatively safe economies such as New Zealand and Australia.

Support for the US dollar waned as German Finance Minister Peer Steinbrueck joined the public discussion on the currency’s status as the world’s reserve currency, and said the yuan, renminbi and euro will slowly take on more significant international roles.

China’s vice foreign minister He Yafei reaffirmed his government’s official view that the greenback’s status isn’t under threat. The public debate helped stoke demand for higher-yielding, or riskier, assets lsuch as the New Zealand dollar.

“More comments around the G-8 added pressure” to the greenback which helped boost the New Zealand dollar, said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. The kiwi’s “not going to break lower before the G-8, and it would take sustained equity weakness” for it to fall outside of its current range, he said.

The kiwi jumped to 63.65 US cents from 62.59 cents yesterday, and gained to 60.26 on the trade-weighted index, or TWI, a measure of the New Zealand versus a basket of five currencies, from 59.49. It advanced to 60.66 yen from 59.60 yen yesterday, and increased to 45.52 euro cents from 44.99 cents. It climbed to 79.76 Australian cents from 79.26 cents yesterday.

Kelleher said the currency may trade between 63.30 US cents and 64 cents today after it failed to break through 62.50 cents yesterday. It was the fourth or fifth time it tested that level, and there are “strong bids” supporting the kiwi.

“People are getting concerned about the 62.50 US cents level,” and Kelleher still recommends selling on rallies.

Comments from Prime Minister John Key calling for the central bank to offer solutions to help bring mortgage rates down weighed on the kiwi in early trading, and the Treasury yesterday cited the currency as a threat to the country’s economic recovery.

The Treasury’s monthly economic indicators report questioned recent commentary suggesting the abnormally large volume of uridashi and eurokiwi bond maturities this month could drag the New Zealand dollar down.

“Reserve Bank research suggests that any effect on the currency at the time of maturity tends to be small, priced in by forward currency markets,” although it did expect an increase in volatility, the Treasury report said.

Some $4.6 billion worth of uridashi and eurokiwi bonds mature this month, compared to the usual $1-1.2 billion redemptions, and investors have tended to roll over around 26% of maturing eurokiwi bonds and 40% of uridashis, according to BNZ research.

The New Zealand Institute of Economic Research announces the results of its quarterly survey of business opinion today, a forward-looking indicator closely followed by the Reserve Bank of New Zealand, which economists predict will show a pick-up in overall sentiment, but highlight underlying weakness in profit expectations and the labour market.

The Reserve Bank of Australia reviews its target cash rate today, and will continue to hold rates at 3%, according to a Reuters survey. Investors will be looking for any hints over when the central bank will begin to tighten monetary conditions again.

Businesswire.co.nz

Comments from our readers

No comments yet