Dollar gains as stocks revive

Thursday 22nd January 2009

The New Zealand climbed back up from a six-year low after Wall Street rebounded from its worst Inauguration Day slump on record as optimism about President Barack Obama's plans to revive the US economy lifted bank stocks.

The Dow Jones Industrial Average jumped 3.5% overnight after reaching a two-month low the previous day, with Citigroup and Bank of America soaring 31% and JPMorgan Chase rising 25%. Stocks rose after nominee for Treasury Secretary Timothy Geithner told the Senate Finance Committee that Obama would produce "a comprehensive plan to help stabilize the core of the financial system." The gain in stocks helped whet investors' appetite for higher yielding, or riskier assets, helping lift the kiwi dollar.

The currency "has a high correlation with how US stocks perform," said Philip Borkin, economist at ANZ National Bank. The late surge on Wall Street "is one of the key reasons why the kiwi posted a solid rebound," he said.

The New Zealand dollar was recently at 53.05 US cents from less than 52 cents yesterday afternoon, when it sank as low as 51.70 cents. The kiwi rose to 80.45 Australian cents from 80 cents and climbed to 47.30 yen from 46.52.

Borkin said the currency market is currently "incredibly volatile." In the medium-term, the outlook is "very heavily downward as the economy goes through this rebalancing."

ANZ National is predicting the kiwi dollar will sink to below 50 cents, reaching about 47 cents by mid-year. Weighing on the currency will be continuing weakness in the domestic economy, further interest rates cuts and growing concern about the size of New Zealand's current account deficit.

Government figures today showed that spending on credit and debit cards dropped 0.7%, seasonally adjusted, last month, while core retailing spending rose 0.2%.

Reserve Bank Governor Alan Bollard is expected to cut the official cash rate by 100 basis points to 4% on Jan. 29 and some economists predict further rate cuts over the next few months to as low as 3%.

Earlier this month, Standard & Poor's lowered the outlook on New Zealand's AA+ foreign-currency credit rating to 'negative,' citing the nation's looming current account gap and rising fiscal deficits. Big deficits reduce New Zealand's "economic flexibility" at a time when of global economic and financial turmoil, it said.

The nation's current account gap widened to $15.5 billion, or 8.6% of gross domestic product in the year ended Sept. 30. The budget deficit will balloon to $10.9 billion by 2011, amounting to 5.6% of GDP, according to Treasury forecasts.

By Jonathan Underhill

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