Dollar falls on G-7 pessimism

By Paul McBeth

Monday 16th February 2009

The New Zealand dollar fell after the Group of Seven (G-7) nations announced an ongoing bleak outlook for the global economy, discouraging investment in higher-yielding, or riskier, assets.

G-7 finance ministers and central bankers expect the "severe" economic downturn will continue through most of the year, and following their meeting in Rome over the weekend, they reaffirmed their commitment to a coordinated approach to reversing the slump. The admission that there won't be an easy answer to the problem encouraged investors to eschew riskier assets in favour of haven currencies.

The G-7 statement "described the economic situation as going through a severe downturn through most of 2009," said Danica Hampton, currency strategist at Bank of New Zealand. "Currencies like the kiwi have fallen off their levels" with traders favouring the US dollar as a "safe haven," she said.

The kiwi fell to 52.20 US cents from 52.82 cents last week, and dropped to 47.74 yen from 48.24 yen. It declined to 40.65 euro cents from 40.90 cents last week, and was unchanged on 79.82 Australian cents.

Hampton said the currency may trade between 51.50 US cents and 52.60 cents today. Once it breaks the 51.50 cent level, "a push lower is likely" and the currency could go into freefall, she said. Trading in the currency may be light today as the US has a public holiday.

The kiwi currency is also facing pressure from falling commodity prices, with the Reuters Jeffries CRB index, a broad measure of the price of raw materials, falling for its fifth day in a row. Plummeting dairy prices have seen Fonterra Cooperative Group, the world's largest dairy exporter, begin to stockpile milk powder.

Japan's fourth quarter GDP data out today may continue to encourage risk aversion, with its annualised figures predicted to show a contraction of 11.7%, according to a Reuters survey of economists.

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