Dollar tumbles to near six-year low on risk aversion

By Paul McBeth

Friday 21st November 2008

The New Zealand dollar tumbled below 53 US cents for the first time in almost six years as falling stock markets worldwide drove investors away from higher-yielding assets.

US stocks were volatile on the prospect that American lawmakers will agree on a plan to bailout the auto industry. General Motors shares gained, trimming a slide that sent the largest US carmaker to its lowest price since 1938. Government figures showed the number of Americans filing for unemployment benefits reached a 26-year high of 542,000 in the week ended November 15. Prospects of a deepening slump in the US helped lift the yen against the US dollar as investors move away from higher-yielding, or riskier, assets like the kiwi.

The New Zealand dollar is "still trading off risk aversion," said Tim Kelleher, corporate risk manager for ASB Bank. With global stocks continuing to fall, it "is going to stay under pressure," he said.

The kiwi tumbled to 52.99 US cents from 53.70 cents yesterday, and slid to 50.63 yen from 51.25 yesterday. It rose to 85.76 Australian cents from 85.56 cents.

Kelleher said the kiwi may trade between 52.50 US cents and 53.25 cents today, and with it "closer to 50 cents than 60," he wouldn't rule out a fall below the 50 cent mark.

The Swiss National Bank unexpectedly cut its benchmark rate by an unprecedented 100 basis points, citing the bleak global economic outlook. The Swiss franc fell against the US dollar to 1.2225 per dollar from 1.2119 yesterday, its lowest level since August last year.

Central banks around the world have been cutting interest rates to protect against the global financial crisis, and New Zealand's Reserve Bank Governor Alan Bollard embarked on his sharpest series of cuts to the official cash rate since its inception in 1999.

Bollard is expected to cut the OCR by a further 100 basis points to 5.5% when he next announces the RBNZ's next review of monetary policy on December 4.

Dairy cooperative Fonterra, New Zealand's biggest corporation by sales and the world's largest exporter of dairy products, is expected today to cut its payout to farmers for the current season due to falling world prices for milk. The weaker kiwi dollar probably helped buffer the impact of sliding prices.

Kelleher said that while expectations have been high, "anything above $5.50 per kilogram is still a good result."

Fonterra lowered its payout estimate to $6.60 in September.

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