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NZ dollar may rise against euro on bank rescues

By Paul McBeth

Monday 6th October 2008

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The New Zealand dollar may gain against the euro and the pound as Europe’s governments try to save some the region’s largest lenders and central banks prepare to cut interest rates.

The German government is leading efforts to salvage a 35 billion-Euro rescue for Hypo Real Estate Holding, that nation’s No. 2 lender, after commercial banks withdrew their support. Belgium and Luxembourg are close to reaching a deal to shore up Fortis after the injection of 11.2 billion euro into the ailing company last week.

“The focus has shifted to Europe,” said Tim Kelleher, corporate risk manager of ASB. The euro and pound have weakened against the dollar as European banks “struggled to buy” the American currency.

The kiwi rose to 48.20 euro cents from 47.84 in New York on Friday. It was little changed at 66.15 US cents from 66.20 cents. The US dollar traded at 1.3636 per euro from 1.3772.

Kelleher said the kiwi may trade between 64.5 US cents and 67.25 cents this week.

The European Union took NZ$5.9 billion of New Zealand’s exports in the 12 months ended August 31, up 14% from a year earlier and accounting for about 14% of total shipments. The UK is New Zealand’s fifth-largest market.

Kelleher said the Bank of England is expected to cut interest rates as much as 50 basis points this week, betting the need to prevent a slump in economic growth outweighs concern about accelerating inflation.

Danica Hampton, currency strategist at Bank of New Zealand, said investors are assessing whether the US banking bailout, which was approved by Congress on Friday, and the European Union’s efforts to stymie the banking crisis will be enough to thaw credit markets.

“If credit markets remain frozen, risk aversion inspired repatriation will likely underpin the dollar and the yen,” she said.

Investors typically borrow in yen to invest in currencies offering higher yields, known as the carry trade. These transactions tend to be reversed when investors bail out of riskier assets and pay back their yen loans.

In New Zealand today, the government is scheduled to release its Pre-Election Fiscal and Economic Update, or Prefu, today, giving investors a snapshot of the government’s accounts.

Prime Minister Helen Clark has said the accounts will show the cash position is deteriorating and Finance Minister Michael Cullen has warned conditions for the government have worsened since his last budget.

The figures in the Prefu probably won’t be enough to drive the currency lower, Kelleher said.

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