Dollar falls as investor pessimism returns

Friday 2nd October 2009

The New Zealand dollar sank below 72 US cents after lacklustre manufacturing data in the US eroded optimism about the global economic recovery and encouraged investors to divest higher-yielding, riskier assets.

The US Dollar Index, a measure of the greenback versus a basket of five currencies, climbed 0.3% to 77.19 as investors flocked to the relative safety of the world's largest economy after American manufacturing growth fell short of expectations and stoked fears the global recovery may not be as strong as hoped.

Jobless claims in the US climbed to 551,000 last week according to government data, ahead of today's non-farm payrolls report which may show the unemployment rate rose to 9.8% in September.

"People were very optimistic and needed to see the data continue to surprise on the upside," said Danica Hampton, currency strategist at Bank of New Zealand. "Should non-farm payrolls disappoint, investors are likely to flock back to safe havens" such as the US dollar and the yen, she said.

The kiwi slid to 71.46 US cents from 72.15 cents yesterday and sank to 64.10 from 64.93 yen. It dropped to 65.4 on the trade-weighted index, or TWI, a measure of the currency against a basket of six trading partners, from 65.67 yesterday, and declined to 49.16 euro cents from 49.49 cents.

It rose to 82.10 Australian cents from 81.86 cents yesterday. Hampton said the currency may trade between 71.10 US cents and 71.80 cents today as equity markets look increasingly heavy, and if it breaks below 71 cents it could sink to 70.60 cents.

Stocks on Wall Street fell the most in a month as the weak data raised questions about the sustainability of the rebound in share prices.

"Equity markets are up around 50% from their lows and look stretched relative to valuation," Hampton said. "If we see equity markets fall, risk appetites will diminish" and support for the kiwi will ease.

The International Monetary Fund said the global recovery is underway in its latest world economic report. Still, it warned that the rebound may be slower than anticipated, and chief economist Olivier Blanchard said "it is very hard to see how global rebalancing does not come with an appreciation of Asian currencies of various degrees."

Until Fonterra Cooperative Group's online auction for milk solids and the New Zealand Institute of Economic Research's Quarterly Survey of Business Opinion next week, the kiwi will continue to follow global news, Hampton said.

Businesswire.co.nz

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