Dollar falls as US stocks drop, stoking risk aversion

Wednesday 22nd April 2009

The New Zealand dollar tumbled to a month-low after Bank of America, the largest US lender by assets, increased its bad loan reserves, leading a slump on Wall Street that stoked global risk aversion.

Shares of Bank of America slumped 24% after investors ignored the lender’s better-than-expected profit, focusing instead on the US$6.4 billion put aside to cover losses on toxic debt.

The Dow Jones Industrial Average slid 3.6% on growing concerns that credit losses are getting worse and after the Conference Board’s index of US leading economic indicators fell more than expected last month, stoking concern the recession will extend into the second half of 2009. The decreasing appetite for risk discouraged investors to seek higher yield, or riskier, assets.

“The markets got a good reality check from the Bank of America earnings result,” said Khoon Goh, senior markets economist at ANZ National Bank. “Money is flooding back to safe havens like gold and the greenback risk aversion grows.”

The kiwi slid to 54.95 US cents from 56.05 cents yesterday, and tumbled to 53.87 yen from 55.22 yen. It sank to 78.73 Australian cents from 79.37 cents, and dropped to 42.54 euro cents from 43.24 cents.

Goh said the currency may trade between 54.55 US cents and 55.45 cents as investors start to look at what the Reserve Bank of New Zealand will do to the official cash rate on April 30.

Economists predict the central bank will cut rates a further 50 basis points to a record-low 2.5%, returning the yield advantage to the Australian dollar and diminishing support for the kiwi.

Bank of New Zealand currency strategist Danica Hampton notes the downward pressure on interest rates in recent weeks “adds to the case for a weaker New Zealand dollar/US dollar cross”, and she continues to predict the OCR will trough at 2%.

The Reserve Bank of Australia releases its minutes today before Governor Glenn Stevens delivers a speech in Adelaide. The market will be watching for any comments that may indicate the central bank may pause any further rate cuts.

Businesswire.co.nz

Comments from our readers

No comments yet