Dollar holds above 57 US cents on better-than-expected GDP

By Paul McBeth

Friday 27th March 2009

The New Zealand dollar held above 57 US cents as the economy had a milder contraction than expected in the fourth quarter, stoking expectations interest rates won't fall much further.

New Zealand's economy shrank 0.9% in the three months to December 31, its fourth consecutive contraction, and potentially the bottom of the peak. Figures yesterday showed the current account deficit widened to $16.1 billion in the fourth quarter, amounting to 8.9% of GDP.

Wall Street staged a rally overnight as the US economy shrank 6.3% for the same period, with the Dow Jones Industrial Average rising 2.3% on optimism the global economy is rebounding from its nadir.

Investors and borrowers are betting that long-term fixed rates are near their lows, spurring an exodus from variable to fixed-rate loans and causing a spike in New Zealand swap rates.

The kiwi rose to 57.78 US cents after the GDP figures from 57.40 cents immediately before the release. The currency is down from 57.96 cents yesterday. The kiwi dropped to 56.78 yen from 56.84 yen. It slid to 81.83 Australian cents from 82.60 cents yesterday, and declined to 42.56 euro cents from 42.66 cents.

"GDP was a touch better-than-expected, but broadly in line with expectations," said Philip Borkin, economist at ANZ National Bank. "The RBNZ is not going to be too happy with the massive increases in swaps and the currency at a time when the economy hasn't found a bottom yet."

Borkin said the currency may trade within a range of 57.14 US cents and 58.75 cents today as the GDP figures failed to dissuade investors from seeking higher yields.

The International Monetary Fund's positive assessment of New Zealand's economy helped lift sentiment. While forecasting a 2% contraction in 2009, the IMF said the nation is "in a better position than most advanced countries to face the global storm" despite the weak outlook in the near-term.

The sharp fall in the kiwi had brought it "broadly in line with fundamentals, and should lead to a narrowing of the current account deficit," the IMF said in its preliminary report.

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