Dollar may fall after OECD highlights need for more easing

By Paul McBeth

Friday 17th April 2009

The New Zealand dollar may fall after an OECD report highlighted the risks to the country's growth and sovereign credit rating, and reinforced the need for further interest rate cuts.

The local economy is predicted to shrink by 2.8% this year, according to the Organisation for Economic Cooperation and Development's economic survey of New Zealand. Monetary policy should be the primary tool for stimulus, due to limitations on fiscal policy, the report said.

Figures today are expected to show first-quarter inflation eased, with the consumer price index falling to 3% from 3.4%, giving Reserve Bank Governor Alan Bollard more room to cut the official cash rate.

"The CPI will be of interest, providing a gauge and idea of whether inflationary pressures are abating, and if there's scope for more easing by the Reserve Bank," said Danica Hampton, currency strategist at Bank of New Zealand. "We've been the worst-performing currency in the last 24 hours, with significant moves against all crosses."

The kiwi fell below 57 US cents for the first time since April 1 yesterday to 56.88 cents. It climbed to 57.12 US cents from 57.01 cents yesterday, and increased to 56.77 yen from 56.25 yen. It dropped to 43.32 euro cents from 43.33 cents yesterday, and fell to 79.25 Australian cents from 79.31 cents.

Hampton said the currency may trade between 56.80 US cents and 57.60 cents today, and she expects it will fall to 55.50 cents in the coming week.

Inflation is expected to fall back into the central bank's 1% to 3% target band, allowing Bollard to continue his easing policy and cut rates. BNZ economists predict the Reserve Bank will cut the OCR by 50 basis points to 2.5% when it meets on April 30, with an eventual rate trough of 2%, Hampton said. The annual rate of inflation is predicted to fall to 3%, according to a Reuters survey.

Investors continued their flight to safety as ongoing fears about the global economy took precedence of gains on Wall Street. China's economic growth fell to 6.1% in the first three months of the year, slightly below forecast, while Eurozone industrial production tumbled 18.4% year-on-year in February, its biggest slide since the series began in 1986.

The US dollar regained some of its safe-haven status after Dominque Strauss-Kahn, managing director of the International Monetary Fund, told the National Press Club in Washington DC there was no reason why the greenback would lose its position as the primary global reserve currency, and that it could play a similar role after the financial crisis is over. The US dollar gained to 99.38 yen from 98.69 yen yesterday.

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