Dollar falls as US stocks weaken, RBA statement awaited

By Paul McBeth

Tuesday 7th April 2009

The New Zealand dollar fell after Wall Street pared its five-day gain amid concerns over the state of the US economy, ahead of this afternoon's rate review by the Australian central bank.

The Dow Jones Industrial Average sank 0.5%, led by banks Citigroup and JPMorgan Chase, after a Calyon Securities report by analyst Mike Mayo said government measures to shore up banks may not help as much as expected and loan losses will exceed Great Depression levels.

The Reserve Bank of Australia is expected to keep its policy interest rate at 3.25%, according to 14 of 23 economists surveyed by Bloomberg News, as it faces its first economic contraction in almost 20 years. If the bank continues its pause on rates, if could leave little room for New Zealand's central bank to move when it meets on April 30 after Governor Alan Bollard signalled maintaining competitiveness in capital markets was important.

After failing to break 60 US cents for the third time since December, the currency "is looking pretty top heavy with a lot predicated on the RBA", said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank. "The risk if for a cut, which could see the Aussie sold off" and could drag the New Zealand dollar lower, he said, referring to the Australian dollar by its colloquial name.

The kiwi fell to 58.81 US cents from 59.43 cents yesterday, and declined to 82.35 Australian cents from 82.93 cents. It sank to 59.40 yen from 60.09 yen yesterday, and dropped to 43.83 euro cents from 43.94 cents.

Kelleher said the currency may trade between 58.50 US cents and 59.20 cents ahead of the RBA Governor's statement, but after that, its movements will rely on the bank's decision.

The currency may also come under downward pressure when the New Zealand Institute of Economic Research releases its Quarterly Survey of Business Opinion, which may show activity in the economy remains weak, but is "not as bad as it has been," said Kelleher. January's QSBO report showed a net 64% of firms expected the economy to deteriorate in the first six months of this year, and that 32% of companies intended to cut staff in the first quarter.

Meanwhile, the Federal Reserve extended its swap facilities with the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan, allowing the Fed to lend US dollars through the other central banks to remove tensions in American cash markets. The arrangement also lets the Fed borrow foreign currencies to lend to US institutions. The announcement mirrors the dollar swaps the Fed established with 14 other central banks, including the RBA.

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