Dollar reaches six-year low

By Paul McBeth

Friday 30th January 2009

The New Zealand dollar is heading for its biggest monthly decline since October as interest rate cuts and a deteriorating global economy push the currency to its lowest level in six years.

The kiwi has tumbled 11% since the start of the year, the most since it plummeted 19% last October, as demand for higher yielding, or riskier, assets dwindles.

Reserve Bank Governor Alan Bollard continued his series of cuts to the official cash rate yesterday, slashing the OCR to a record low of 3.5% and saying "the decline in global growth prospects and the ongoing uncertainty has played a large part" in the decision. A slew of weak economic data from the US saw the US dollar and yen surge as investors eschewed risky assets for safer options.

"There are only two safe-haven currencies - the greenback and the yen," said Khoon Goh, senior markets economist at ANZ National Bank. "It's a case of a synchronized global recession" which is driving investors' risk aversion.

The kiwi traded at 51.44 US cents from 51.41 cents yesterday and down from 58 cents at the start of the month. It rose to 78.61 Australian cents from 78.25 cents yesterday, and fell to 46.17 yen from 46.30 yen. The kiwi increased to 39.69 euro cents from 39.32 cents yesterday.

Goh said the kiwi may trade between 51.05 US cents and 52.35 cents today. He forecasts the current account deficit will continue to increase, and predicts the currency will have to fall below 50 cents and head towards the low forties to help reduce the deficit and improve the health of the New Zealand economy.

Earlier this month, Standard & Poor's lowered the outlook on the nation's AA+ credit rating t 'negative' citing the current account gap and rising budget deficits.

The US was rocked by a string of weak data yesterday, pushing the Dow Jones Industrial Average down 2%, halting a four-day advance. New home sales in December plummeted 14.7% from the previous month, while unemployment benefit claims in January exceeded expectations, jumping to 588,000 and dashing the prospect of a speedy economic recovery.

New Zealand's central bank will continue to monitor the global situation closely, with Bollard not ruling out more cuts to the OCR in response to concerns about the global and domestic economies, he said yesterday. Economists are forecasting the benchmark rate may go as low as 2%, which will help push the exchange rate down further.

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