Dollar gains as greenback sentiment weakens

Friday 22nd May 2009

The New Zealand dollar gained as further signs of global economic weakness and the prospects of the US credit rating being downgraded after the UK’s rating outlook was cut to negative eroded sentiment for the greenback.

S&P lowered the outlook for the UK’s credit rating, stating “even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP.”

The prospect of a downgrade in the US which was first mooted by New York-based think-tank Peter G. Peterson Foundation last week, causing investors to eschew the American currency.

The Dow Jones Industrial Average sank 1.5%, its third daily decline, after the Labor Department reported initial jobless claims fell by 12,000 to 631,000 last week, less than expected and down from a revised 643,000 in the previous week. The total number of Americans on benefits rose to a record.

“The concern about the US rating is total speculation, but no-one wants US dollars,” said Philip Borkin, economist at ANZ National Bank. “The shock UK downgrade was not expected, but it was surprising it filtered to the US”

The kiwi gained to 61.14 US cents from 60.41 cents yesterday, and rose to 57.73 yen from 57.17 yen. It increased to 44.01 euro cents from 43.77 cents yesterday, and climbed to 78.47 Australian cents from 78.37 cents.

Borkin said the currency may trade between 60.30 US cents and 61.30 cents today. While he doubts it will break the topside, he expects it will test the higher limits as Asian markets react to the credit rating outlook downgrade of the world’s fifth-largest economy.

US Treasury Secretary Timothy Geithner said he’s obligated to ensure a strong dollar and committed to maintaining confidence in the world’s reserve currency.

The US dollar slid to US$1.3894 per euro from US$1.3795 yesterday, and dropped to 94.40 yen per dollar from 94.67 yen.

New Zealand’s AA+ foreign currency credit rating was placed on negative watch by S&P in January as the current account deficit ballooned to 8.9% of GDP in the three months ended December.

The Treasury predicts it narrowed back to 8.6% in the first quarter. Prime Minister John Key and Finance Minister Bill English have reiterated their administration will keep on top of the nation’s debt in the face of a “decade of deficits”.

S&P is waiting until the New Zealand government announces its plan to cut spending and improve the fiscal position when it unveils its budget next week. One-in-three countries put on a negative watch have their credit rating downgraded, Borkin said.

Businesswire.co.nz

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