Dollar holds near seven-month high on fears over greenback

Tuesday 2nd June 2009

The New Zealand dollar held near a seven-month high as investors eschewed the greenback in favour of higher-yielding, or riskier assets amid concerns over the ability of the US to fund its record budget deficit.

The Dollar Index, a measure of the greenback versus its six largest trading partners, fell some 6.8% last month as fears heightened over how the world’s largest economy will fund its budget blow-out.

The kiwi has clawed back half of its losses after falling to as low as 49 US cents in March from as high as 82 cents in the same month of 2008 when investors fled risky assets amid the credit crunch and widening economic slump. Resurgent optimism, including a pick-up in US consumer confidence, has encouraged investors to unwind their holdings in US dollars and look for higher yields.

“Demand for the US dollar as a funding currency has diminished,” said Imre Speizer, currency strategist at Westpac Banking Corp. On top of this, “the dollar’s being punished for its large funding imbalance,” he said.

The kiwi slipped to 64.91 US cents from 65.03 cents yesterday, and rose to 62.28 yen from 61.48 yen. It advanced to 80.22 Australian cents from 80 cents yesterday, and gained to 45.83 euro cents from 45.64 cents yesterday.

Speizer said the currency may pull back to 64.50 US cents today after it broke several key technical levels over the past few days, but will probably “push a little higher” this week with global sentiment continuing to improve.

Demand for the greenback will be tested next week when the US government holds Treasury auctions for 10- and 30-year bonds, and will gauge support for the currency, as the Obama administration’s budget deficit is projected to hit a record US$1.75 trillion.

Longer-term bonds will be a better indicator than last week’s sale of short-term securities as investors often use near-term investments to “park their cash”, said Speizer.

The Australian central bank reviews its monetary policy today, and is expected to hold its benchmark rate at 3%. The Reserve Bank of Australia paused in its rate cuts last month, citing evidence of a pick-up in the global economy.

If the RBA maintains its rate, economists predict Governor Alan Bollard will keep New Zealand’s official cash rate at 2.5%. Bollard slashed the OCR a further 50 basis points in his last review, and said interest rates would be at a low level until late next year.

Businesswire.co.nz

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