Dollar tumbles on US, Europe jobs data

Friday 3rd July 2009

The New Zealand dollar tumbled as job losses in the US and Europe provided a reality check for optimistic investors, eroding appetites for higher-yielding, or riskier, assets and adding further negatives on the kiwi currency.

The jobless rate climbed to 9.5% in both Europe and the US, a 10-year and 26-year high respectively, quashing sentiment the end of the recession is drawing near, and pushing stocks down.

This added to the gloomy global outlook that had already seen European Central Bank President Jean-Claude Trichet downbeat forecast for growth and Moody’s Investment Services downgraded Ireland’s sovereign rating to Aa1 from Aaa.

The New Zealand currency was already under pressure after prices fell in Fonterra Cooperative Group’s online auction yesterday, and the rising focus on uridashi and eurokiwi redemptions this month.

“There’s increased global concerns about risk” that saw investors eschew assets like the kiwi dollar, said Danica Hampton, currency strategist at Bank of New Zealand. “There was a lot of interest in the kiwi and it should underperform on the back of the uridashis and Fonterra auction.”

The New Zealand dollar tumbled to 62.87 US cents from 63.59 cents yesterday, and dropped to 59.60 on the trade-weighted index, or TWI, a measure of the currency against a basket of major trading partners, from 60.07.

It retreated to 60.28 yen from 61.45 yen yesterday, and declined to 44.91 euro cents from 45.64 cents. It was little changed at 79.17 Australian cents from 79.14 cents yesterday.

Hampton said the currency may trade between 62.50 US cents and 63.50 cents today, and should find some support around 62.80 cents. It probably won’t drop below 60 cents, as the broader trend is for a weaker US dollar, and she sees the kiwi continuing to trade between 60 cents and 65 cents for the rest of the year.

Some $4.6 billion worth of uridashi and eurokiwi bonds mature this month, compared to the usual $1 billion-to-$1.2 billion redemptions, and Hampton said retail accounts in Japan were active sellers of the kiwi.

Investors have tended to roll over around 26% of maturing eurokiwi bonds and 40% of uridashis, according to BNZ research, and this large volume is expected to weigh on the New Zealand currency.

The ECB held its benchmark interest rate at 1% yesterday, and will start buying mortgage and public sector bonds ranging from three to 10 years and rated as low as BBB- as part of its unorthodox measures to lift the region out of recession.

Trichet said the central bank doesn’t intend on cutting rates again, and predicted the Euro-zone economy will resume growing in the middle of next year.

The gloomier global outlook weighed on the prospect of an early recovery, and investors turned their backs on higher yields in favour of the relative safety of the US dollar and yen.

The Chicago Board Options Exchange’s Volatility Index, or VIX, a measure of volatility on the Standard & Poor’s 500 Index, rose 7.8% to 27.95.

The greenback gained on the renewed pessimism, with the Dollar Index, a measure of the US dollar against the currencies of six major trading partners, gained 0.8% to 80.26. Comments from Chinese officials for a stable US dollar eased concerns it won’t push for a new reserve currency at the Group of Eight summit in Italy next week.

Businesswire.co.nz

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