Dollar may extend slide on gloomy outlook for economy

Friday 16th January 2009

The New Zealand dollar, down almost 10% since January 8, may extent its slide amid a deteriorating outlook for the local economy and signs of a prolonged worldwide slump.

Prime Minister John Key yesterday said the Treasury had wound back its forecast for the economy, which may tread water this year rather than climbing out of its first recession in a decade, with the jobless rate climbing as high as 7.5%.

His comments capped a week in which the nation's credit rating outlook was cut to 'negative' by Standard & Poor's while a survey showed companies are the most gloomy about their own activity since at least 1970.

In the US, figures showed initial jobless claims rose to 524,000 last week, seasonally adjusted, while producer prices fell 1.2% last month. Intel Corp., the World's No. 1 maker of computer chips, yesterday posted a 90% slump in fourth-quarter profit on waning demand.

The kiwi dollar fell to 53.77 US cents from 54.07 cents yesterday and weakened to 80.88 Australian cents from 81.91 cents. The currency fell to 40.88 euro cents from 41.06 cents. It climbed slightly to 48.31 yen from 48.16 yen.

"It's been a week of carnage for the New Zealand dollar," said Danica Hampton, currency strategist at Bank of New Zealand. "A re-test of November's sub-0.5200 low is looking increasingly likely in coming session," she said.

Helping drive the currency lower, economists are now predicting a deeper cut the to the official cash rate when Governor Alan Bollard announces his review of monetary policy on January 29.

Shamubeel Eaqub, economist at Goldman Sachs JBWere, revised his forecast cut to 100 basis points to 4%, from a previous forecast of 75 basis points, with the OCR getting as low as 3% this year.

"Rapid deepening and broadening of the economic recession coupled with accumulating evidence of sharply retreating inflation concerns open the door for aggressive OCR cuts from the RBNZ to pull the economy up from the current nose dive," Eaqub said yesterday in a report.

He joins Westpac Banking Corp. in forecast a 100 basis points cut. Westpac predicts the OCE will sink to 2.5% by mid-year.

The European Central Bank yesterday cut its benchmark rate by 50 basis points to 2% and ECB President Jean-Claude Trichet said rates may fall again in March as the region's economy slides further into recession.

Economic indicators point to a "significant slowing down" compared to the ECB's forecasts last month, Trichet said. Still, the ECB would probably resist cutting rates to almost zero, as the Fed has done.

By Jonathan Underhill

Comments from our readers

No comments yet