Dollar advances as US dollar weakens

Friday 12th December 2008

New Zealand�s dollar gained to a two-week high as the US dollar weakened against the euro on speculation the ECB will hold off on making deeper cuts to interest rates.

European Central Bank council member Axel Weber was reported in Germany�s Boersen-Zeitung newspaper as saying a cut in the region�s benchmark rate below 2% when inflation was expected to be less than 2% implied negative real interest rates. The kiwi extended its gains after economic reports in the US stoked fears of a more prolonged recession, driving stocks on Wall Street lower.

�The currency will take its near-term cues from global equities and U.S dollar sentiment,� Danica Hampton, currency strategist at Bank of New Zealand, said in a report. �The news suggests the world is still in a dire state,� she said.

The kiwi gained to about 55 US cents from 54.50 cents yesterday. The currency�s gains may be capped by government figures today that are expected to show retail sales growth stalled in October.

Reports this week have showed manufacturing has extend its slump in New Zealand, while a decline in house prices suggest the property market hasn�t yet felt the benefit of lower interest rates.

The Bank of New Zealand Performance of Manufacturing Index sank to a record low 36.4, where a reading below 50 indicates a contraction.

Hampton said traders may sell the kiwi if it gains above 56 cents, given �the backdrop of slowing global growth and fragile risk appetite, the New Zealand recession and falling New Zealand interest rates.�

By Jonathan Underhill

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