Dollar holds above 64 US cents as greenback slides

Friday 12th June 2009

The New Zealand dollar held above 64 US cents as central bank Governor Alan Bollard’s decision to keep interest rates unchanged stoked investor appetite for the kiwi, while the greenback slid as traders sought high-yielding, or riskier, assets.

The Reserve Bank held the official cash rate at 2.5% yesterday as Bollard said more stable economic conditions gave the central bank positive prospects “for the first time in some months.”

Bollard said the strong New Zealand dollar was creating “unhelpful tensions” for his desired export-led recovery, but he predicts the currency will remain at these levels in the coming months before it embarks on a sustained depreciation. The US dollar declined as better-than-expected American retail data spurred investors to eschew the world’s reserve currency in favour of higher yields.

The kiwi dollar rose “partly because of the US dollar weakened overnight, and was also a case of the flow-on from the RBNZ decision and local interest rate yields looking reasonably strong,” said Philip Borkin, economist at ANZ National Bank. “There’s still room for it to remain at these elevated levels for some time yet.”

The kiwi rose to 64.35 US cents and has gained 3.8% this week, have advanced from 64.36 cents yesterday. It slipped to 62.81 yen from 62.91 yen yesterday, and dropped to 78.45 Australian cents from 78.86 cents. The currency sank to 45.59 euro cents from 45.85 cents yesterday and dropped to 60.53 on the trade-weighted index, or TWI, from 62.91.

Borkin said the currency may trade between 64.05 US cents and 65.05 cents today as risk appetite continues to hold sway among investors. A rally in US Treasuries after strong demand at an auction of 30-year notes, drove yields lower and increased the appeal of higher yields available on New Zealand debt, he said.

Yields on two-year Treasuries fell 3 basis points to 1.3% and 10-year notes slipped 8 basis points to 3.85%, and dented demand for the US currency. New Zealand 10-year bonds are yielding about 6.06%.

Danica Hampton, currency strategist at Bank of New Zealand, said weakness in the US dollar raised questions whether the currency’s retracement is already over.

“We think the key level to watch is 79.00 in the USD Index,” she said. “A break below 79.00 will mean a re-test of last week’s 78.00 low is imminent.”

The Dollar Index, a measure of the US dollar against a basket of its major trading partners, fell to 79.54 from 79.87 yesterday.

Although the kiwi wasn’t justified at its “elevated levels” against the US dollar, Borkin said a pull-back in the Australian cross could stoke confidence among exporters.

The New Zealand dollar could push higher today if retail sales show further signs of a pick-up in the economy, he said. The data series is expected to show a 0.2% increase in consumer spending in May month-on-month, according to a Reuters survey, from a fall of 0.4% the previous month.

Businesswire.co.nz

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