Dollar tumbles on weak US data and falling stocks

Thursday 15th January 2009

The New Zealand dollar tumbled after a slump in US retail sales and weaker economic data from Europe drove down stocks and sapped demand for higher yielding, or riskier investments.

The currency fell below 54 US cents for the first time in about four weeks after figures showed US retail sales fell a greater-than-expected 2.7% last month, heightening concern about the prolonged slump in the world's biggest economy.

Citigroup plunged 23%, leading the Dow Jones Industrial Average down 2.9%, as the bank sheds assets to ensure its survival. Germany's economy shrank as much as 2% last quarter, according to government estimates. The worldwide economic slowdown is sapping global trade, weighing on the economy and currency of New Zealand, where business confidence has plummeted.

The kiwi dollar's slide this month "is the beginning of a major move downwards," said Imre Speizer, currency strategist at Westpac Banking Corp., who predicts the currency will fall to between 45 US cents and 50 US cents in the next four months.

The global downturn is "causing a shrinkage of trade worldwide and that's causing New Zealand to start felling the effects more and more," he said.

The New Zealand dollar fell as low as 53.95 US cents from 55.19 cents yesterday, marking it as the world's worst-performing currency over the past 24 hours. It recently traded at 54.21 US cents, bringing its five-day slide to more than 8%. The local currency declined to 81.85 Australian cents from 83.12 cents and weakened to 48.23 yen from 49.19. The kiwi slipped to 41.07 euro from 41.83.

Westpac yesterday updated its forecast for New Zealand interest rates, predicting Reserve Bank Governor Alan Bollard will slash the official cash rate by 100 basis points to 4% on Jan. 29 and continue making cuts until the OCR reaches just 2.5% by mid-year.

Economists at the trading bank are predicting bigger rate cuts after the Quarterly Survey of Business Opinion this week showed companies are the most gloomy about their own trading over the next three months since at least 1970, with one in three firms planning to shed workers.

The QSBO "was beyond ugly" and has caused economists to revise down a lot of other indicators, Speizer said.

Prime Minister John Key has convened a meeting of senior ministers at the Beehive today to discuss the economy's plight and possible government responses after saying yesterday he planned a series of "rolling mauls" of assistance to the nation's businesses.

Standard & Poor's cited the prospect of ongoing fiscal deficits and a ballooning current account gap this week when lowering the outlook on New Zealand's AA+ foreign-currency debt rating to 'negative.'

The revision reflects New Zealand's "narrowing economic policy flexibility in light of the country's widening external imbalances, as evidenced by the sizeable current account deficit," S&P credit analyst Kyran Curry said.

The nation's current account deficit widened to $15.5 billion, or 8.6% of gross domestic product in the year ended Sept. 30. The prolonged recession is eroding the government's tax revenue at a time it wants to accelerate spending on major infrastructure projects and Finance Minister Bill English last month predicted budget deficits will remain until 2013.

By Jonathan Underhill

Comments from our readers

No comments yet