Dollar gains as CIT rescue pushes Wall St higher

Tuesday 21st July 2009

The New Zealand dollar gained as stocks on Wall Street pushed higher on the news bondholders will bail out lender CIT Group to the tune of US$3 billion, whetting investors’ appetites for higher-yielding, or riskier, assets.

Shares in 101-year-old lender CIT surged 79% after the bondholders’ rescue package was reportedly signed off by the board, and helped stoke a rally on Wall Street as the Dow Jones Industrial Average and Standard & Poor’s 500 gained 1.2% and 1.1% respectively.

Investors continued to eschew the relative safety of the greenback as they sought out high returns, pushing the Dollar Index, a measure of the world’s reserve currency against a basket of six trading partners, to a six week low of 78.83.

“The kiwi and the Aussie led the charge” on the back of a weaker greenback during the early parts of the London session, said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “Equity markets recovered and risk currencies are being bought.”

The kiwi gained to 65.72 US cents from 65.41 cents yesterday, and climbed to 61.41 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 61.25. It increased to 61.94 yen from 61.77 yen yesterday, and advanced to 46.18 euro cents from 45.97 cents.

It was unchanged at 80.53 Australian cents. Kelleher said the currency may trade between 65.50 US cents and 66 cents today, and will continue to drag on the nation’s economy.

“Everyone wants their currency lower so they can export themselves out of recession,” he said.

Today’s migration figures should show a rising inflow of permanent residents in New Zealand as fewer people leave the country and more expatriates return home in tougher global economic climate.

While the data should support the economy as it continues to underpin the stabilising housing market, Kelleher doesn’t expect it will seep into foreign exchange markets.

Federal Reserve Chairman Ben Bernanke will testify in front of Congress and Senate hearing panels on Tuesday and Wednesday in Washington DC, and the US dollar is expected to take its lead from what he says, according to Danica Hampton, currency strategist at Bank of New Zealand.

“There is a risk that Bernanke fails to deliver or that he leaves the impression that quantitative easing may be extended” which would send the greenback lower, Hampton said. “In the interests of calming investor nerves he will express the desirability of a clear exit strategy for when the time is right as well as returning to fiscal sustainability over the longer-term.”

Businesswire.co.nz

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