Dollar may fall as global economic outlook deteriorates

Thursday 23rd April 2009

The New Zealand dollar may fall on concern the global economic outlook will slump further this year, with the International Monetary Fund downgrading its forecast for global growth while the UK government announced a surge in borrowing to lift its economy out of recession.

The IMF estimates the global economy will shrink 1.3% this year from an earlier prediction of 0.5% growth, and also cut its 2010 forecast to 1.9% growth from 3%. British Chancellor of the Exchequer Alistair Darling delivered a budget with 269 billion pounds of extra additional borrowing and an increase in the top tax rate to 50%, leading to heavy selling of the sterling pound which saw it shed a cent against the US dollar.

“The IMF outlook was awful – 1.3% is more than any other forecasts,” said Danica Hampton, currency strategist at Bank of New Zealand. “It will be a slow grind lower for the kiwi” as investors look to next week’s review of the official cash rate, she said.

The kiwi gained to 55.50 US cents from 55.44 cents yesterday, and rose to 54.28 yen from 54.23 yen. It sank to 78.52 Australian cents from 78.68 cents, and dropped to 42.65 euro cents from 42.82 cents.

Hampton said the currency may trade between 56 US cents and 55 cents and will probably break its month-low of 54.90 cents in the next couple of sessions.

The IMF report noted New Zealand and Australian central banks are better placed than their counterparts to deal with the global recession, with room to cut interest rates further.

The Reserve Bank of Australia cut its target cash rate 25 basis points to 3% earlier this month, while New Zealand’s central bank has slashed 525 basis points from its benchmark rate to 3% since embarking on its easing policy in July.

Reserve Bank Governor Alan Bollard is expected to cut the OCR 0.5 percentage points to a record-low 2.5% when he reviews rates next week, and Hampton predicts the benchmark rate will trough at 2% with interest rates likely to “remain low for some time.”

Businesswire.co.nz

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