Greenback's shaky reserve status stokes kiwi's rise

Wednesday 3rd June 2009

The New Zealand dollar soared to a near eight-month high as demand for the greenback slumped on the prospect that a new supranational currency will be discussed by the largest emerging economies when they meet later this month.

Russian President Dmitry Medvedev suggested emerging market leaders may consider a supranational currency at a meeting of the so-called BRIC economies of Russia, Brazil, India and China later this month. Medvedev first floated the idea in March.

The Dollar Index, which tracks the greenback’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell 1% to 78.39, the lowest this year.

“No-one wants to hold US dollars,” said Philip Borkin, economist at ANZ National Bank. “The US dollar index is approaching some key support levels and it could make or break” the currency, he said.

The kiwi gained to 65.54 US cents from 64.88 cents after rising as high as 65.89 cents earlier today. It rose to 62.70 yen from 62.29 yen yesterday, and increased to 45.82 euro cents from 45.79 cents. It slipped to 79.88 Australian cents from 80.15 cents yesterday.

The currency pared its advance after the price of milk powder slumped 12% in Fonterra Cooperative Group’s latest online auction, stoking concern protectionist moves by Europe and the US will undermine any recovery in dairy prices.

The average price of milk powder sank to US$1,886 per metric ton, according to results posted on the GlobalDairyTrade website, down from US$2,144 last month. In New Zealand dollar terms, prices tumbled 19%.

Borkin said the currency may trade between 65.20 US cents and 66.20 cents today as investors continue to eschew the US dollar. He said the kiwi has reached unsustainable levels, and the Reserve Bank of New Zealand must be concerned about its ongoing strength.

“There could be potential next week” for the central bank to try to jawbone the currency down when it reviews monetary policy, Borkin said. The strength of the kiwi on a TWI basis should be of some concern to the RBNZ, he said.

The trade weighted index of the New Zealand dollar, which measures the kiwi against the basket of currencies of major trading partners, climbed 4% last week and 9% in the past month. The Treasury and the central bank have substantially lower levels, 23% and 28% declines respectively, forecast for the TWI by the first quarter of 2010, said Danica Hampton, currency strategist at Bank of New Zealand.

The strength of the Australian economy may continue to buoy the currency today, with first-quarter gross domestic product expected to show the economy grew 0.2%, avoiding a recession, according to a Reuters survey.

The Reserve Bank of Australia kept its target cash rate on hold at 3% yesterday, but indicated it would continue to monitor the economy for signs of weakness and would be willing to ease monetary conditions further.

Economists predict the RBNZ will probably keep the official cash rate at 2.5% when it reviews monetary policy next week, despite the ongoing strength in the kiwi. Governor Alan Bollard slashed the OCR to a record-low in the bank’s last meeting, and said interest rates would stay at a low level until late next year.

Businesswire.co.nz

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