Dollar slides as falling US unemployment stokes prospect of early Fed hike

Monday 7th December 2009

The New Zealand dollar slid below 72 US cents after figures showed American unemployment unexpectedly shrank to 10% and the world’s largest economy shed fewer jobs than forecast, raising the prospect of an early interest rate hike by the Federal Reserve next year.

The US economy shed 11,000 jobs last month, much fewer than the 125,000 expected, in its smallest decline since December 2007, stoking speculation America’s labour market is mending much earlier than predicted.

The data raised the prospect Fed chairman Ben Bernanke will be forced to hike interest earlier than anticipated, and caused investors to pare back their positions in higher-yielding, or riskier, assets.

The Dollar Index, which measures the greenback against a basket of six trading partners, surged 1.4% to 75.75 as traders began to unwind their short positions in the US dollar, where they sell the currency in the expectation of being able to buy it back cheaper.

“It could be a watershed if investors want to take risk off the table, and we could see the likes of the New Zealand dollar under pressure,” said Philip Borkin, economist at ANZ National Bank. “The New Zealand dollar was really on the sidelines, and rose against the majors” which took a much bigger hit from the US dollar strength, he said.

The kiwi dropped to 71.50 US cents from 72.43 cents on Friday in New York and slipped to 64.12 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 64.27. It rose to 64.76 yen from 63.79 yen last week and slipped to 78.09 Australian cents from 78.20 cents. It edged up to 48.12 euro cents from 48.05 cents last week and declined to 43.43 pence from 43.54 pence.

Borkin said the currency may trade between 71.30 US cents and 72 cents today and will take its cues from Asian equity markets and how they digest the US employment data.

Today’s wholesale trade survey in New Zealand isn’t expected to move the currency much, but will be the first of several economic indicators analysts will be looking at to make their predictions for how the country’s economy performed during the September quarter.

ANZ National economists currently predict gross domestic product grew 0.5% in the period.

Businesswire.co.nz

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