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Dollar gains as China cuts rates

By Paul McBeth

Thursday 27th November 2008

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The New Zealand dollar gained after the biggest cut to interest rates in China since 1997 helped lift prices of raw materials, which may drive demand for the currencies of commodity-producing nations.

The People’s Bank of China slashed its benchmark rate 108 basis points to 5.58% yesterday, one day after the World Bank said growth in China would fall to 7.5%, its slowest annual pace since 1990. The European Union is coordinating a 200 billion euro plan across its 27-nation bloc to boost the sagging regional economy. In the US, stocks rose for their fourth day in a row as investors picked up technology shares trading near record lows. Aluminium producer Alcoa jumped almost 7%.

The measures are “giving a boost to commodity markets,” said Khoon Goh, senior markets economist at ANZ National Bank. “That might see some impact on the kiwi and Australian currencies.”

The kiwi rose to 55.40 US cents from 55.07 cents yesterday and increased to 52.50 yen from 52.32 yen. It held steady against the Australian dollar, rising to 84.63 cents from 84.62 cents yesterday, and jumped to 42.70 euro cents from 42.28 cents.

In New Zealand, figures out today may show the trade deficit for the month of the October narrowed to $1 billion as the weaker New Zealand dollar boosted the value of exports. The annual deficit may have widened to $5.2 billion from $4.98 billion, according to Reuters.

Goh said the New Zealand dollar will not see a “huge reaction” to domestic data as it continues to trade on offshore news. He said it may trade between 54.75 US cents and 55.44 cents today.

Investors will get the latest snapshot of sentiment in the New Zealand market with the release today of National Bank’s business confidence survey for November. Last month’s survey showed confidence plunged with all sectors pessimistic about the future.

Weak data and ongoing pessimism about the domestic economy will encourage Reserve Bank Governor Alan Bollard to cut the official cash rate next week by as much as 100 basis points, according to the consensus of economists’ estimates. Bollard has embarked on the steepest series of cuts to the OCR since its introduction in 1999.

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