Dollar slides as Asian central banks revive greenback

Thursday 4th June 2009

The New Zealand dollar tumbled after central banks of Asia’s wealthiest nations said they would continue to buy Treasuries, reviving support for the greenback which has slumped in the past month amid fears the US risks a downgrade to its credit rating.

Central bank officials from China, Japan, India and South Korea told Reuters a downgrade in the AAA rating of the world’s largest economy wouldn’t cause them to change their reserve policies, partly due to the lack of alternatives available.

Federal Reserve chairman Ben Bernanke told a Congress committee a strong US dollar was necessary for a strong economy, and that he didn’t see any risk to the greenback’s status as the world’s reserve currency. The kiwi sank as much as 3% before paring its loss in trading today, after it gained as much as 12% in the past three weeks.

“The kiwi had gained too far, too fast,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “Once the herd is moving in the same direction, it’s time to get out.”

The kiwi sank to 63.28 US cents from 64.76 cents yesterday, and retreated to 60.72 yen from 62.10 yen. It dropped to 79.13 Australian cents yesterday and slipped to 44.73 euro cents from 45.53 cents.

Kelleher said the currency may trade between 62.80 US cents and 63.60 cents today as support dissipates for higher-yielding, or riskier, assets.

The Reserve Bank of New Zealand is scheduled to announce its review of monetary policy next week. Kelleher expects the central bank will keep the official cash rate at 2.5%, though he predicts Governor Alan Bollard will voice his concern over long-term interest rates and the strong currency.

The Euro-zone economy shrank 2.5% in the first three months of this year, and the European Central Bank’s Ewald Nowotny heralded a downbeat assessment of the coming two years for the region.

The ECB will review its monetary policy tomorrow, and while it isn’t expected to cut rates, there’s some speculation the bank will embark on a policy of quantitative easing to help lift the ailing economy out of recession.

The Swedish krona fell to its lowest level in six weeks against the euro on concerns Latvia will devalue its currency after a Latvian government debt auction failed to attract any bids. A devaluation of the lat would reduce the value of loans in the country held by Swedish banks, and there are concerns a domino effect might occur in the Nordic nations. The kiwi gained to 4.8924 krona from 4.8845 krona yesterday.

Businesswire.co.nz

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