Dollar falls as US equities tumble

Tuesday 12th May 2009

The New Zealand dollar fell from a six-month high as Wall Street snapped its rally on increasing signs General Motors is heading for bankruptcy, sales of new stock by banks and as some investors sold down their holdings after the recent rally.

Capital One Financial Corp., US Bancorp and BB&T Corp. will sell shares to repay more than US$7.5 billion owed to the US government for its assistance through the Troubled Asset Relief Program.

GM chief financial officer Fritz Henderson told a conference the automaker was considering the possibility of bankruptcy on a “country-by-country” basis. The Standard & Poor’s 500 Index sank 2.2% as risk appetite evaporated and investors returned to the relative safety of assets like the US dollar and yen.

The currency is “heavily tied to risk appetite and sentiment,” said Philip Borkin, an economist at ANZ National Bank. “It may have been pushed too far” yesterday when it reached 61 US cents.

The kiwi slipped to 60.05 US cents 60.36 cents yesterday, and dropped to 58.42 yen from 59.01 yen. It fell to 44.18 euro cents from 44.36 cents yesterday.

Borkin said the currency may trade between 59.80 US cents and 60.80 cents today, and will probably track down to 57 cents later this week as investors recognise it’s “arguably been pushed above fair value.”

While the Australian economy has fared reasonably well in the face of the global slump, when its government announces it budget tonight it may show the nation has the same challenges around ballooning debt and rising unemployment. The kiwi was little changed at 79.03 Australian cents from 79.01 cents yesterday.

The Reserve Bank of New Zealand releases its Financial Stability Report tomorrow, which may show New Zealand’s banks have held up well in the face of the credit crisis, but Borkin said there may be some commentary on interest rates and the currency, which have remained stubbornly high since Governor Alan Bollard slashed the official cash rate to a record-low 2.5% two weeks ago.

Bollard embarked on the steepest series of easing since the inception of the OCR a decade ago, and has cut 5.75 percentage points since July.

Businesswire.co.nz

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