Dollar falls as Eurozone economy shrinks

Monday 18th May 2009

The New Zealand dollar fell as European economies contracted at a faster-than-expected rate, renewing concerns about the state of the global economy, and encouraging investors to eschew high-yielding, or riskier, assets.

The Eurozone economy shrank 2.5% quarter-on-quarter in the first three months of the year, faster than the 2% forecast by economists, while the German economy slumped 3.8%, the largest contraction since 1970.

The Standard & Poor’s 500 Index slid 1.1%, and ended the week down 5% in its worst weekly loss since March. The Chicago Board Options Exchange volatility index, or VIX, surged 5.6% on Friday as investors on Wall Street looked for relatively safe investment options.

“Investors are starting to question the recovery after the terrible Euro data,” said Danica Hampton, currency strategist at Bank of New Zealand. “The markets got overly optimistic (and the kiwi) could have further to run this week.”

The New Zealand dollar slipped to 58.50 US cents from 58.88 cents last week, and dropped to 55.44 yen from 55.86 yen. It rose to 78.13 Australian cents from 77.84 cents last week, and fell to 43.35 euro cents from 43.41 cents.

Hampton said the currency may trade between 57.90 US cents and 59.20 cents today as “growth sensitive currencies come under pressure this week” from the decline in global sentiment. She expects the currency will be beholden to international influences this week ahead of next week’s budget.

Prime Minister John Key told CNBC last week that the New Zealand dollar’s decline below 80 Australian cents “makes sense” given the relative size of the two economies and the fact that Australia isn’t technically in recession yet.

Key and Finance Minister Bill English have reiterated the May 28 budget will allay rating agencies’ concerns about the economy, and avert a credit downgrade.

Businesswire.co.nz

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