Dollar pares gains ahead of GDP, current account

By Paul McBeth

Monday 23rd March 2009

The New Zealand dollar pared its gain from a two-month high before figures expected to show New Zealand's recession deepened in the fourth quarter while the current account deficit worsened.

New Zealand's economy probably shrank 1% in the three months to December 31 according to a Reuters survey, and economists are forecasting the recession will extend into six consecutive quarters. The current account deficit is expected to have widened to $16.1 billion in 2008 from $15.5 billion in the 12 months ended September 30, as demand for the country's exports continues to wane.

Meantime, Australian Prime Minister Kevin Rudd, the leader of New Zealand's largest trading partner, said it is "virtually impossible" for his country's economy to sustain growth as the global economy contracts.

"We're expecting pretty bad numbers" when New Zealand's gross domestic product data is released on Friday, said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank. "The kiwi should be driven by the US dollar and the Dow Jones" ahead of the data release later this week, he said.

The kiwi fell to 55.77 US cents from 56.13 cents last week, and rose to 53.44 yen from 53.05 yen. It sank to 81.07 Australian cents from 81. 13 cents last week, and increased to 41.06 euro cents from 41.01 cents.

Kelleher said the currency may trade between 55.50 US cents and 56.10 cents today as investors continue to support the Australian and New Zealand dollars as central bank's including the Federal Reserve and Bank of England begin quantitative easing.

The Reserve Bank of New Zealand cut the official cash rate to 3% on March 12, having slashed rates 525 basis points from 8.25%. Governor Alan Bollard ruled out a near-zero policy, predicting the OCR would trough around 2.5%.

The Dollar Index, a measure of the US currency versus its top six trading partners, slumped 4.1% last week to 83.84, its biggest decline since 1985 when the US, UK, France, Japan and West Germany agreed to coordinate the devaluation of the currency against the yen and deutsche mark.

The US dollar has slumped since the Federal Reserve announced last week it would embark on a policy of quantitative easing to lift its economy out of recession. Stocks on Wall Street slipped at the end of the week, and US Treasurer Timothy Geithner is under pressure to announce the Obama Administration's plan to remove toxic assets from banks' balance sheets.

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