Dollar holds below 67 US cents as global stocks slide

Tuesday 18th August 2009

The New Zealand dollar held below 67 US cents as rising fears the world’s economic recovery won’t be as fast as previously expected pushed global stocks down and weighed on investors’ appetite for higher-yielding, or riskier, assets.

China’s Shanghai Composite Index tumbled 5.8% after government data showed foreign direct investment tumbled to 35.7% in July from a year earlier, while the Standard & Poor’s 500 index sank 2.4% on the gloomier outlook for economic recovery.

The Chicago Options Board Exchange’s Volatility Index, or VIX, a measure of the cost of protecting puts on the S&P 500, surged 14% to 27.68, in a sign investors are returning to a more conservative outlook after five weeks of gains in US equity markets.

“Far too much good news has been built into the stock markets,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia.

“The US dollar is looking strong and should slowly grind up as people begin profit-taking on equities and currency markets.”

The kiwi increased to 66.80 US cents from 66.70 cents yesterday and rose to 62.63 on the trade-weighted index, or TWI, a measure of the currency versus a basket of five trading partners, from 62.59 yesterday. It climbed to 63.11 yen from 63.06 yen yesterday, and advanced to 47.44 euro cents from 47.29 cents. It dropped to 81.32 Australian cents from 81.49 cents yesterday.

Kelleher said the currency may trade between 66.50 US cents and 67.10 cents today as traders begin to unwind their short positions, where they sell an asset betting it will fall in value and they can buy it at a cheaper price at a later date, on the US dollar.

“It looks like people are structurally short on the US dollar and have been unwinding them since the University of Michigan survey” last week, which showed a decline in US consumer confidence, Kelleher said.

Japan climbed out of recession in the three months through June, as its gross domestic product grew 0.9% for the quarter, in data released yesterday. Economists were predicting a 1% gain, and the Nikkei 225 Index slumped 3.1% in its biggest daily loss for five months.

The proportion of government bonds held offshore rose to 76.6% in July from 73% in June, according to Reserve Bank of New Zealand data released yesterday. Still, the total value of the bonds held by foreign investors declined 6.9% to $15.5 billion.

Businesswire.co.nz

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