Dollar edges lower, bigger falls seen with rate cuts

Friday 23rd January 2009

The New Zealand dollar edged lower against the greenback as further signs of weakness in the US economy fueled risk aversion and demand for higher-yielding currencies.

The kiwi dollar may extend its slide as investors prepare for the Reserve Bank's Monetary Policy Statement on January 29. With the official cash rate currently at 5%, the central bank has room to slash interest rates further, unlike the Federal Reserve, Bank of England, Bank of Japan and European Central Bank. That means the rates gap is set to narrow, undermining the appeal of the kiwi.

The New Zealand dollar traded at 52.74 US cents, down from 53.12 cents in late trading yesterday. The currency slipped to 80.38 Australian cents from 80.68 cents and fell to 46.82 yen from 47 yen. It declined to 40.59 euro cents from 40.89 cents.

"Plenty of scope exists here in New Zealand for further reductions" to interest rates, said Tony Alexander, chief economist at Bank of New Zealand. "A fall in the kiwi dollar below the 50 cent level in the near future seems a very easy call."

Governor Alan Bollard will lower the OCR by 100 basis points to 4% next week, according to the consensus in a Reuters survey. Some economists predict a cut of as much as 150 basis points as the central bank is forced to revise down its forecasts in December for a gradual rebound in economic growth this year.

"We will be looking closely to see to what extent the Reserve Bank have pulled back from their misplaced optimism in early December regarding the New Zealand recession ending," Alexander said.

Robin Clements, chief economist at UBS New Zealand, predicts the central bank will add to a 100 basis point cut next week with two further 50 basis point reductions in coming months.

Figures yesterday showed manufacturing lifted only slightly in December from a record low the previous month, and the sector is still mired in recession. Credit and debit card spending slipped 0.5% in December, according to government figures yesterday. Excluding auto-related purchases, sales gained 0.2% in December from November, the report showed. The card figures are an early indicator of retail sales in the latest month after spending was unexpectedly little changed in November.

Shares fell on Wall Street, with the Dow Jones Industrial Average declining 1.3% as Citigroup and Bank of America tumbled and Microsoft fell on lower-than-expected earnings.

By Jonathan Underhill

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