Dollar tumbles as concern about US banks erodes risk appetite

Wednesday 2nd September 2009

The New Zealand dollar tumbled to a two-week low after concerns about the state of some US banks sapped stocks on Wall Street and eroded investors' appetite for higher-yielding, riskier assets.

"The kiwi tumbled on broad-based US dollar strength after financial sector concerns re-emerged and offshore equities got smashed," said Mike Jones, strategist at Bank of New Zealand.

With the return to a more downbeat outlook, "risk is skewed in favour of a move lower today."

The kiwi sank to 67.49 US cents from 68.27 cents yesterday, and slipped to 62.94 on the trade-weighted index, or TWI, a measure of the currency versus the greenback, yen, euro, pound and Australian dollar, from 63.34.

It declined to 62.67 yen from 63.56 yen yesterday, and fell to 47.44 euro cents from 47.63 cents. It rose to 81.71 Australian cents from 81.58 cents yesterday.

Jones said the currency may trade between 67 US cents and 68 cents today after today's online dairy auction saw the price of milk powder surge some 24%.

Fonterra Cooperative Group's globalDairyTrade website saw the currency pare some of yesterday's losses, but the downbeat outlook will probably keep the kiwi from climbing higher today, he said.

The Dow Jones Industrial Average declined 2% amid fears some lenders in the US may be facing more losses, and pushed the Chicago Board Options Exchange's Volatility Index, which measures the cost of insuring puts on the Standard & Poor's 500, to a seven week high 29.18.

The downbeat sentiment encouraged investors to shun higher yields and return to the relative safety of the greenback and yen. The Dollar Index, a measure of the US dollar against a basket of five currencies, climbed to 78.72 from 78.17 yesterday.

The Reserve Bank of Australia held its benchmark interest rate at 3% yesterday, and Governor Glenn Stevens statement didn't offer any clues as to when the central bank will look at hiking rates.

New Zealand's central bank will make its quarterly monetary policy statement next week and is expected to keep the official cash rate at a record-low 2.5% and reiterate its stance that rates will remain at or below current levels until late next year.

Businesswire.co.nz

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