Dollar gains as Citigroup optimism lifts US stock-market

By Paul McBeth

Wednesday 11th March 2009

The New Zealand dollar gained as Citigroup led a rally in US stocks and US Federal Reserve chairman urged revamped financial market regulation to smooth boom-and-bust cycles, lifting investor appetite for higher-yielding, or riskier, assets.

A memo from the chief executive of Citigroup reports strong earnings for the bank in the first two months of this year, and the bank will likely report its best quarterly earnings since the third quarter of 2007. Shares in the bank jumped 36%, leading the charge on Wall Street, which had its best rally of the year as the Dow Jones Industrial Average rose 5%.

Fed chairman Ben Bernanke recommended a review of regulations to reduce the excessive swings in the economy, and reiterated his call for an agency to take on responsibility for financial stability.

"The remarkable rebound in global equities encouraged investors to trim 'safe-haven' currency positions and this saw the US dollar weaken against a broad range of currencies," said Danica Hampton, currency strategist at Bank of New Zealand. "Quasi-sovereign and Asian central banks were reportedly heavy sellers of US dollars."

The kiwi rose to 49.91 US cents from 49.78 cents yesterday, and gained to 49.31 yen from 498 yen. It was up to 77.84 Australian cents from 77.65 cents yesterday, and increased to 39.49 euro cents from 39.15 cents.

Japanese security houses and banks increased holdings of riskier assets like the New Zealand dollar yesterday as they bought currencies across the range in New York, said Imre Speizer, currency strategist at Westpac Banking Corp.

"It was more a flow event than a big event", but helped spark the sell-off in yesterday's trading, he said.

The kiwi may trade between 49 US cents and 50.50 cents today as it continues to look for a catalyst, said Speizer. Tomorrow's monetary policy statement by the central bank may see some "knee jerk" reactions, but Speizer said it will be the circuit-breaker to drive the currency below its current ranges.

Most economists are predicting Reserve Bank Governor Alan Bollard will cut the official cash rate by 50 basis points to 3%. Speizer said a cut within expectations may cause the currency to rise and a larger reduction would be needed to drive the kiwi lower. Westpac economists forecast a 100 point cut, which will probably put downward pressure on the currency, he said.

The Reserve Bank embarked on its steepest easing of monetary policy in July when Bollard began slashing rates. The OCR has fallen 475 basis points to 3.5%. The currency may start taking its direction from local indicators as the ongoing "doom and gloom" of global economic climate is failing to provide a catalyst for it to break its range, Speizer said.

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