Dollar falls as global stocks tumble

By Paul McBeth

Tuesday 2nd December 2008

The New Zealand dollar extended its decline as global stocks tumbled on concern the US economy is heading for a prolonged recession, discouraging investment in higher-yielding, or riskier assets.

The US economy sank into recession a year ago, with the fall in employment of 1.2 million people the main factor in determining the contraction, the National Bureau of Economic Research said on its website. The Standard & Poor's 500 Index fell 5.4%, halting a five-day rally. Germany's DAX 30 index dropped 5.9% as weak manufacturing figures in the US drove European stocks down.

"Investors shunned the kiwi in favour of safe havens like the yen and the US dollar," said Danica Hampton, currency strategist at Bank of New Zealand. Last week's optimism has reversed as investors' appetite for risk waned, she said.

The kiwi fell to 53.49 US cents from 53.56 cents yesterday, and dropped to 49.96 yen from 50.69 yen yesterday. It dropped to 82.80 Australian cents from 83.16 cents yesterday.

Hampton said the kiwi may trade between 53.25 US cents and 53.80 cents today. The yen rose to a one-month high against the US dollar as investors repatriated their funds away from higher-yielding assets. It fell to 93.16 yen per US dollar from 94.16 yen yesterday. The kiwi fell below 50 yen for only the second time since the terrorist attacks in 2001.

The Reserve Bank of Australia will review its benchmark rate today, and is expected to cut rates by 75 basis points to 4.5%. Australia's September balance of payments and October retail sales figures will be released before the central bank makes its announcement.

In New Zealand, Reserve Bank Governor Alan Bollard will review the official cash rate later this week, and expectations are growing that he will cut the OCR by 150 basis points to 5%. In July, Bollard embarked on the steepest series of rate cuts since the implementation of the benchmark rate in 1999.

Hampton said the slew of interest rate cuts worldwide may restore sentiment in financial markets though they could also be read as a sign of a deepening global economic slump.

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