Dollar slides as World Bank report erodes risk appetite

Tuesday 23rd June 2009

The New Zealand dollar slid below 63 US cents for the first time in a week after the World Bank downgraded its outlook for the global economy, stoking a sell-off in higher-yielding, or riskier, assets.

Stocks on Wall Street and in Europe tumbled after the World Bank predicted the global economy would shrink 2.9% this year, worse than the 1.7% forecast in March, encouraging investors to return to the relative safety of the US dollar and yen.

High unemployment will make this year “very difficult,” Angel Gurria, head of the OECD, was reported as saying. At a press conference in Wellington yesterday, Prime Minister John Key reiterated Reserve Bank Governor Alan Bollard’s warning that a strong New Zealand dollar would hinder the economy’s export-led recovery.

“There were some pretty downbeat comments from the World Bank and OECD” which gave a reality check on the recent rallies in equity and currency markets, said Philip Borkin. “There are a few nerves ahead of the Fed this week” when the Federal Open Market Committee reviews its interest rate target and policy settings.

The kiwi sank to 62.88 US cents from 63.55 cents yesterday, and dropped to 59.90 on the trade-weighted index, or TWI, a measure of the currency against its major trading partners, from 609.97 yesterday. It slid to 60.27 yen from 60.97 yen yesterday, and gained to 79.97 Australian cents from 79.66 cents.

The New Zealand dollar dropped to 45.36 euro cents from 45.84 cents yesterday.

Borkin said the currency may trade between 62.70 US cents and 63.50 cents today, and may test the bottom support level if the downturn in sentiment continues into Asian equity markets.

The FOMC is expected to hold its target interest rate band of between zero and 0.25%, according to a Reuters survey, and economists predict it will maintain its current quantitative easing programme, when it meets on Thursday New Zealand time. Investors will be looking for comments on whether the Fed will reiterate rates will be kept at low levels for an extended period, or if it will hint at an exit strategy.

Demand for US government bonds underpinned the greenback’s strength, as yields on US two-year notes fell 7 basis points to 1.13%, and US 10-year Treasuries declined 7 points to 3.68%. The Dollar Index, a measure of the greenback against a basket of six currencies, rose 0.2% to 80.82.

The US dollar may need to undergo “fairly substantial adjustments” for the US economy to achieve a boost in exports for a sustainable recovery, said International Monetary Fund chief economist Olivier Blanchard.

Investors ignored the good news out of Germany, where the Ifo institute’s business climate index showed future expectations improved for the third straight month. The euro was little changed at US$1.3859 from US$1.3858 yesterday.

Businesswire.co.nz

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