Dollar holds above 60 US cents amid weak US housing data

Wednesday 20th May 2009

The New Zealand dollar held above 60 US cents as investors eschewed the greenback in favour of high-yielding, riskier assets, amid concerns the US property market may hinder the recovery of the world’s biggest economy.

The Dollar Index, which measures the greenback against the euro, pound, Swiss franc, Canadian dollar and Swedish krona, fell 0.3% to 82.412 as US housing starts sank 13% to an annual rate of 458,000, the lowest level since records began in 1959.

The Chicago Board Options Exchange volatility index, or VIX, tumbled 5.3% to its lowest level since the collapse of Lehman Brothers in September. A lower VIX indicates investors are willing to seek out riskier assets in search of higher yields.

The weak US housing data shows “their economy is still struggling,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “The Dollar Index is looking weak and the VIX got smashed yesterday” as investors fled the greenback, he said.

The kiwi slipped to 60.17 US cents from 60.44 cents yesterday and has gained 2.6% since Monday. It dropped to 57.76 yen from 58.20 yen yesterday and fell to 44.12 euro cents from 44.35 cents. It was down to 77.59 Australian cents from 78 cents yesterday.

Kelleher said the currency may trade between 59.90 US cents and 60.50 cents today “slightly upward bias” after Wall Street closed a touch lower. The Dow Jones Industrial Average slipped 0.3% yesterday.

The Reserve Bank of Australia minutes out yesterday showed New Zealand’s largest trading partner is “pretty upbeat” about its economy, Kelleher said.

He predicts New Zealand’s central bank will keep the official cash rate at 2.5% when it reviews monetary policy next month, and said Governor Alan Bollard’s hands are tied by ongoing demand for high deposit rates and the need to keep New Zealand’s OCR competitive.

“A lot of people will need funding for the budget next year, and he’ll want to keep something that’s attractive” to offshore investors, he said.

Bollard slashed the OCR to 2.5% last month in the steepest series of cuts to the benchmark rate since its inception a decade ago.

Businesswire.co.nz

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