Dollar holds near 63 US cents

Friday 10th July 2009

The New Zealand dollar held near 63 US cents as the Bank of England kept its level of asset purchases unchanged, stoking risk appetite from investors who took the decision as a sign the global economy may be improving.

The Bank of England kept its benchmark interest rate unchanged at a record-low 0.5% and said it would hold its quantitative easing programme at 125 billion pounds, and cut its weekly purchases to 4.5 billion pounds from 6.5 billion pounds.

That means the last money will be spent on July 29, when it will decide whether to print more money. The central bank’s move surprised the markets, which took it as a sign that the flight to safety earlier in the week was unwarranted, and stoked appetites for higher-yields. The pound climbed 0.9% to US$1.634 and helped lift higher-yielding currencies, such as the kiwi.

The BoE’s decision not to “expand its QE squeezed the sterling positions, and took the currency higher,” said Brendan Marsh, from Bank of New Zealand’s foreign exchange desk.

“Sentiment is fickle and fluid” and traders will have to wait until next week to see whether the kiwi can push lower, he said.

The kiwi dollar fell to 62.96 US cents from 63.35 cents yesterday, and dropped to 59.54 on the trade-weighted index, or TWI, a measure of the currency versus a basket of five major trading partners, from 59.96. It slipped to 58.54 yen from 59 yen yesterday, and tumbled to 44.85 euro cents from 45.31 cents. It retreated to 80.41 Australian cents from 80.62 cents yesterday.

Marsh said the currency may trade between 62.70 US cents and 63.40 cents today as it ends the week back in the middle of the range. After early expectations it could break below key levels this week, yesterday’s erosion of risk aversion will keep it in familiar ranges, he said.

Leaders of the Group of Eight nations avoided a showdown over the status of the greenback as the world’s reserve currency after they agreed not to devalue their currencies. Nations including Russia, China and India have suggested replacing the US dollar with the International Monetary Fund’s special drawing rights.

The New Zealand dollar managed to hold above 80 Australian cents as the fall in commodity prices on Wednesday caused its trans-Tasman counterpart to weaken. The Australian currency fell further out of favour when a Chinese buyer walked away from a coal shipment yesterday.

The prospect of this month’s abnormally large amount of eurokiwi and uridashi bonds maturing continues to loom over the kiwi dollar, although it could be a couple of weeks before it plays out, with the majority of the securities maturing at the end of the month.

“It’s all quiet on that front and we’ll have to wait and see,” Marsh said, although BNZ expects the Japanese retail houses may prefer to shift their holdings in foreign currencies to Australia and other emerging nations.

Some $4.6 billion worth of uridashi and eurokiwi bonds mature this month, compared to the usual $1-1.2 billion redemptions, and investors have tended to roll over around 26% of maturing eurokiwi bonds and 40% of uridashis, according to BNZ research.

Businesswire.co.nz

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