Dollar gains on bolstering risk appetites, shrugs off Fitch warning

Friday 17th July 2009

The New Zealand dollar rose as global equity markets extended their gains, bolstering investors’ appetite for higher-yielding, or riskier, assets, rebounding from yesterday’s drop after Fitch Ratings issued a warning about the external imbalances in the nation’s economy.

Yesterday, the kiwi sank as much as 1.1% after Fitch reaffirmed New Zealand’s AA+ rating, but revised its outlook to ‘negative’ from ‘stable,’ citing the country’s looming current account deficit and rising debt levels.

Currency traders shrugged off the warning and continued to seek higher yields as Wall Street continued to advance after JPMorgan Chase & Co., the second largest bank in the US, announced a better-than-expected profit for the three months ended June 30.

The Dollar Index, a measure of the greenback versus a basket of currencies, slipped 0.3% to 79.22 as investors eschewed the relative safety of the U.S. dollar.

“Fitch’s outlook has been totally ignored – it’s just risk on, risk off,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “It’s quite weird that the US is clearly showing signs of recovery while the New Zealand economy is still struggling,” but investors are still supporting the New Zealand dollar, he said.

The kiwi gained to 64.83 US cents from 64.26 cents yesterday, and advanced to 60.85 on the trade-weighted index, or TWI, a measure of the currency against the greenback, Australian dollar, yen, euro and pound, from 60.49.

It rose to 60.82 yen from 60.22 yen yesterday, and increased to 45.82 euro cents from 45.62 cents yesterday. It was little changed at 80.41 Australian cents from 80.33 cents yesterday.

Kelleher said the currency may trade between 64.75 US cents and 65.20 cents today as investors continue to follow equity markets. If the Dow Jones Industrial Average extends its gains today, the currency could break through its levels on thin trading volumes after-hours in New York, he said.

Fitch doesn’t have the same credibility with the markets as Standard & Poor’s and Moody’s Investor Services, which both reaffirmed their outlooks and ratings for county’s economy following Finance Minister Bill English’s May budget, Kelleher said. Still, he was surprised the warning didn’t have a greater impact on the currency.

“The kiwi isn’t trading off fundamentals – it’s trading off the US dollar,” he said.

The dispute between China and Australia after Rio Tinto turned down an offer from Chinalco to buy into the world’s third largest mining company, has kept the Australian dollar under pressure, and the kiwi may “outperform” against its trans-Tasman cousin, Kelleher said.

Adding to the bullish global sentiment was China’s stronger-than-expected economic growth in the second quarter. The world’s fourth largest economy grew 7.9% year-on-year for the period.

Businesswire.co.nz

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