Dollar tumbles below 52 cents

Wednesday 21st January 2009

The New Zealand dollar tumbled below 52 cents after a slump in financial stocks in the US and Europe prompted investors to become more risk averse, trimming holdings of higher yielding or riskier assets.

The kiwi dollar may extend its slide with figures today set to show weakening retail sales, adding to pressure on the central bank to make a deeper cut to interest rates at its policy review on January 29.

The kiwi recently traded at 51.94 US cents, a briefly dipped down to 51.84 cents, from 54.33 cents yesterday. A sustained drop below 51.90 cents, a key support level, could put the currency into freefall, said Imre Speizer, a strategist at Westpac Banking Corp. The kiwi most recently tried to breach that level on December 5.

"If that breaks and holds the break then we go into another freefall," Speizer said. "A new wave" of risk aversion has the added facet of fears over credit risk, he said.

Banks tumbled on Wall Street, the UK and Europe amid fears they will need more capital to cope with losses. State Street tumbled 49% to US$18.60, in the biggest slump for 25 years, after the biggest money manager for institutions said unrealized losses on fixed-income securities rose to US$6.3 billion at December 31 from $3.3 billion three months earlier.

The losses on bonds were almost twice the amount analysts had expected, stoking speculation the firm will be forced to raise more capital.

The FTSE 100 Index fell a second day, led by banks, amid concern more lenders will be nationalized, erasing the value for existing investors. The UK government pledged an extra 100 billion pounds to support its banks. Lloyds Banking Group tumbled 31% and Barclays Plc sank 17% after analysts at Exane BNP Paribas said the banks were at risk of being taken over by the government.

Figures this morning are expected to show retail sales fell 1.2% in November, on falling petrol prices and weak demand for vehicles. After a report yesterday showed inflation pressures are evaporating in New Zealand, the retail figures "may be enough to nudge" the kiwi dollar lower, Speizer said.

Reserve Bank Governor Alan Bollard is expected to slash the official cash rate by 100 basis points to 4% next week and some economists predict the OCR will be cut as low as 2.5% this year.

By Jonathan Underhill

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