Dollar extends decline as carry trades unwind

By Paul McBeth

Monday 17th November 2008

The New Zealand dollar extended its decline as weakening US shares spurred investors to unwind carry trades, where loans in low-interest currencies like the yen are used to fund investments in higher-yielding assets such as the kiwi.

Leaders of the G-20 met in Washington over the weekend to discuss the global economic slump and agreed broad plans to strengthen the financial system. The leaders urged governments to continue cutting interest rates, but stopped short of pushing any specific plans to stimulate growth. The yen has strengthened 2.5% against the US dollar in the past two weeks as investors repaid loans in Japan�s currency.

�We�re definitely seeing an unwinding of the carry trade� and that�s weighing on the kiwi, said Khoon Goh, senior markets economist at ANZ National Bank. �Riskier assets are set to underperform.�

The kiwi fell to 55.22 US cents from 56.05 cents on Friday, and dropped to 53.18 yen from 54.31 yen. The US dollar is slightly weaker against the yen, buying 96.30 yen per dollar, down from 96.92 on Friday.

Goh said the kiwi could trade between 54.50 US cents and 56.05 cents today, as it �continues its downward trend.�

In New Zealand, the domestic recession is established and set to continue, said Shamubeel Eaqub, director of Australian & New Zealand Investment Research, who today predicted the economy will continue to contract into 2009.

�Rapid deterioration in global growth prospects in recent months mean that we have now marked down the economic outlook for 2009,� he said. He forecasts the economy will shrink 1% in the coming 12 months.

As part of the measures to shore up confidence in the New Zealand economy, Reserve Bank Governor Alan Bollard is expected to continue slashing the official cash rate next month, with a reduction of at least 50 basis points, economists say. Bollard has been cutting rates since July in the sharpest easing cycle since the OCR was introduced in 1999.

Lower interest rates tarnish the appeal of investments in New Zealand dollars. Foreigners held $14.3 billion, or 74.5% of New Zealand government bonds in the market last month, according to central bank figures on Friday. That�s down from $15.6 billion, or 77%, six months ago.

www.businesswire.co.nz

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