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NZ Dollar Slumps To Two-Year-Low

Contributor:
Fuseworks Media
Fuseworks Media

Wellington, Oct 7 NZPA - The NZ dollar slumped to a two-year low against the US dollar overnight following "carnage" in international markets.

The strong US dollar saw the NZ dollar fall to US62.03c at 8am today from US65.15c at 5pm last night.

The NZ dollar was last down at that level in August 2006.

Bank of New Zealand currency strategist Danica Hampton said the NZ dollar's "dramatic plunge" was the result of "carnage" in currency markets which started in Asia yesterday afternoon.

"Asian equity markets skidded 4-6 percent and this triggered heavy selling of NZ dollar/yen and Australian dollar/yen from Japanese margin accounts.

"The NZ dollar liquidation continued as global growth concerns and fears about the health of financial sector saw heavy losses chalked up in European and US equity markets."

The German DAX fell 7.07 percent, the London FTSE 7.9 percent and the S&P500 was down 8 percent during late trading.

The NZ dollar dropped below 67 yen to 62 -- its lowest level since December 2002, Ms Hampton said.

"While last night's moves in the NZ dollar/US dollar were fairly dramatic, they were not inconsistent with our medium-term view of NZD/USD. We expect the combination of a sharp slow-down in NZ growth, further RBNZ interest rates and deteriorating terms of trade to weigh on the local currency.

"Our forecasts have NZD/USD at US62.00c by year-end and troughing around US60.00c in the first half of the 2009."

The NZ dollar may fall faster and further than the forecasts though, Ms Hampton said.

Consolidation was expected after the dollar's overnight slump with buyers being attracted by the low price but any bounce back in the NZ dollar would be "limited", she said.

Risk aversion saw "investors flock" to the relative safety of gold and government debt overnight.

"Looking ahead, the main focus will continue to be on how credit markets respond to the approved US banking bailout plan and the European pledge to prevent Eurozone bank failures.

"While the official measures should eventually shore up confidence in the troubled banking sector, providing a bit of a prop for credit markets and financial stocks, the recovery may take months."

ANZ senior economist Khoon Goh said the NZ dollar had already looked vulnerable heading into the London session overnight.

"A lack of liquidity meant the NZ dollar could not cope with the flows sending it down several big figures in a short space of time."

But the kiwi continued rising against the Australian dollar ahead of the Reserve Bank of Australia (RBA) monthly board meeting today.

The NZ dollar was buying A88.40c at 8am today from A86.50c at 5pm yesterday and A84.95c at 5pm on Friday.

The NZ dollar was buying 0.4608 euro at 8am from 0.4780 euro at 5pm yesterday and 62.37 yen from 67.60 at 5pm yesterday.

The trade weighted index was down to 61.13 from 63.39.

The Australian dollar, euro and yen were all down against the US dollar.

The Australian dollar fell to a three-year low of US70.05c, after falling 6.6 percent since yesterday's local close of US74.97c.

NZPA WGT kc nb

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