Dollar bounces back as US economy grows

Friday 30th October 2009

The New Zealand dollar bounced back from its three-week low after the US economy grew more than expected in the third quarter, and eased concerns the global recovery is beginning to stall.

The world's largest economy grew 3.5% annualised in the three months ended September 30, more than the 3.2% predicted, and prompted investors to return to higher-yielding, riskier assets after lacklustre data over the past few days had eroded confidence in the global recovery.

Stocks on Wall Street gained on the news, with the Dow Jones Industrial Average climbing 2.1% as traders pared back their positions in so-called safe-haven assets such as the greenback and yen.

"Everyone that decided to sell yesterday climbed out of their safe haven positions" and took on riskier assets again, said Danica Hampton, currency strategist at Bank of New Zealand. "There's still some concern out there about the global recovery. Fiscal stimulus underpinned the GDP number, and that may not be a good barometer of growth."

The kiwi jumped to 73.51 US cents from 72.58 cents yesterday, and has gained 1.6% this month. It rose to 65.99 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 65.45 yesterday, and dropped to 80.07 Australian cents from 80.28 cents.

It surged to 67.19 yen from 65.78 yen yesterday and increased to 49.48 euro cents from 49.20 cents. It advanced to 44.39 pence from 44.17 pence yesterday.

Hampton said the currency may trade between 72.30 US cents and 73.75 cents today and will follow Asian equity markets amid the upturn in global sentiment.

The Reserve Bank of New Zealand yesterday kept the official cash rate at a record-low 2.5% and Governor Alan Bollard made it clear to the markets that he isn't going to begin tightening monetary policy prematurely.

Bollard said "in contrast to current pricing, we see no urgency to begin withdrawing monetary policy stimulus" and that rates are expected to stay at the same level until the second half of next year.

Hampton said Bollard's stance took the heat out of the interest rate swaps market, with a sharp sell-off in New Zealand swaps and an increase in US swap rates showing a "definite narrowing" of the spread.

The Bank of Japan will review its benchmark interest rate today, and while it isn't expected to move, it will give traders another insight into the region's sentiment. Meanwhile, the University of Michigan Consumer Confidence Survey and the Chicago PMI come out in the US today, and should add to the picture of the world's largest economy.

Businesswire.co.nz

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