Dollar tumbles as risk appetite dims

By Paul McBeth

Thursday 13th November 2008

The New Zealand dollar fell a third day as risk appetite dimmed and stocks tumbled after the US Treasury scrapped plans to use government funds to buy toxic mortgage assets.

The yen had its biggest gain against the US dollar in two weeks after US Treasury Secretary Henry Paulson said the remaining half of the US$750 billion aid package would be used to make credit more accessible for consumers. Coupled with a profit warning from electronics chain Best Buy Co., US stocks slumped, driving the Dow Jones Industrial Average down 3.1% and the Standard & Poor's 500 down 3.6%.

"Risk appetite is back off again" and that's weighing on the kiwi, said Philip Borkin, economist at ANZ National Bank. "People are realising the real side of the economy is looking quite terrible."

The New Zealand dollar dropped to a two-week low of 56.10 US cents from 57.29 cents yesterday and declined to 53.45 yen from 55.05 yen. Borkin said the kiwi will probably trade between 55.50 US cents and 57.40 cents today.

The yen strengthened to 95.28 per US dollar from 97.55.

Signs of the deepening domestic recession should be confirmed by quarterly retail sales figures out today. The figures should "cement the expectation of a further contraction of Q3 gross domestic product and this may see the dollar fall," said Borkin.

A bleak outlook for the domestic economy and poor profit results will add to the pressure on Reserve Bank Governor Alan Bollard to cut the official cash rate further. ANZ National Bank predicts the OCR will go as low 4.75% early next year.

Construction company Fletcher Building yesterday forecast a fall in full-year profit of as much as 38%, although this may be offset by the incoming government's planned infrastructure investment.

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