Dollar nears 10-week high

By Paul McBeth

Tuesday 24th March 2009

The New Zealand dollar neared a 10-week high as the Obama administration's plan to remove toxic assets from banks' balance sheets stoked investor optimism, boosting stock markets and encouraging support for high-yielding, or riskier, assets.

US President Barack Obama and Treasury Secretary Timothy Geithner unveiled their Public-Private Investment Program, which aims to finance US$1 trillion worth of illiquid real-estate assets dragging down banks' balance sheets, using US$75-100 billion from existing rescue packages with around 5% made up from private investment. Financial stocks on Wall Street rallied on the news, with Bank of America climbing 24.9% and Citigroup jumping 19.9% as the Dow Jones Industrial Average surged 6.8%.

"The New Zealand dollar extended its gains last night as global equities surged and investors were cheered by the US Treasury's new Private-Public investment program," said Danica Hampton, currency strategist at Bank of New Zealand. "The strong rebound in global equities and improving risk appetite bolstered demand for growth-sensitive currencies."

The kiwi jumped to 57.16 US cents from 56.55 cents yesterday, and climbed to 55.30 yen from 54.45 yen. It dropped to 81.08 Australian cents from 81.12 cents yesterday, and rose to 41.85 euro cents from 41.42 cents.

The optimism stoked by the plan saw the kiwi dollar push past 57 US cents for the first time since January 13, which has been accompanied by an increase in interest rate swap spreads between the US and New Zealand. "NZ-US three-year swap spreads are currently sitting at 2.15%, well up on the 1.53% low seen on March 9," Hampton said.

The currency may trade between 56.70 US cents and 57.50 cents as "the vacuum of local data" will see it following equity markets' lead, said Khoon Goh, senior markets economist at ANZ National Bank. "It could make a dash for 60 US cents" before "snapping-back" when fourth-quarter data for gross domestic product and the current account deficit are released this week, he said. ANZ National predicts New Zealand's economy probably contracted 1.2% for the three months to December 31, and expects the current account deficit to widen to $16.1 billion from $15.5 billion.

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