Dollar falls as equities slip on weak US consumer data

Wednesday 1st July 2009

The New Zealand dollar fell as US and European equities tumbled on data showing the UK economy shrank the most in more than 50 years and unexpectedly weak US consumer confidence, eroding investor appetite for higher-yielding, or riskier, assets.

The UK economy contracted 2.4% in the first three months this year, the biggest quarterly decline since 1958, prompting investors to return to the relative safety of the US dollar. US equities stumbled after the Conference Board’s sentiment index showed American consumer confidence stalled in June, raising concerns the world’s largest economy won’t recover quickly. The kiwi and Australian dollars may come under pressure this month if investors look to take advantage of the 15% and 16% respective quarterly gains to sell the currencies.

The trans-Tasman currencies “came off pretty quickly after the worst UK GDP data in 50 years,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “We can see the kiwi and the Aussie weaker over the next few days” as investors stake profits, he said.

The currencies may also follow equities lower, with the potential for the Dow Jones Industrial Average to drop after its biggest quarterly rally since 1998.

The New Zealand dollar dropped to 64.51 US cents from 65.10 cents yesterday, and slipped to 60.92 on the trade-weighted index, or TWI, a measure of the kiwi against a basket of major trading partners’ currencies, from 61.19. It declined to 62.13 yen from 62.39 yen yesterday, and fell at 45.98 euro cents from 46.11 cents. It was little change at 80 Australian cents from 80.07 cents yesterday.

Kelleher said the currency may trade between 64.25 US cents and 64.75 cents with a bias to the downside today as it continues to trade in the wider 62 cents to 65 cents range. The kiwi has a lot of support at 63.20 cents and it’s hard to see what will push it below that, he said.

New Zealand inflation is likely to be an “enormous challenge” for the central bank when confidence returns to the global markets, it said in its annual statement of intent yesterday. The resilient kiwi dollar has been a bugbear for the Reserve Bank as it hinders Governor Alan Bollard’s desired export-led recovery.

This month will see the maturity of some $4.6 billion eurokiwi and uridashi bonds and could weigh on the kiwi as so-called Japanese housewives and Belgian dentists see Australia offering better returns.

The yield on two-year government bonds in Australia is 3.98%, eight basis points higher than New Zealand’s 3.9% on a similar debt. Both are still more attractive than the 1.35% offered for a German two-year bund or the 0.3% yield on a two-year Japanese bond.

Businesswire.co.nz

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