Dollar drops on global market turmoil

The kiwi fell to 65.88 US cents at 5pm in Wellington from 66.53 cents at 8am and 66.82 cents on Friday in New York. The trade-weighted index declined to 71.07 from 71.25. Photo / Thinkstock

The New Zealand dollar dropped back below 66 US cents as stocks across Asia followed Wall Street and Europe lower after weaker-than-expected Chinese manufacturing data last week reignited concern the world's second-biggest economy is slowing.

The kiwi fell to 65.88 US cents at 5pm in Wellington from 66.53 cents at 8am and 66.82 cents on Friday in New York. The trade-weighted index declined to 71.07 from 71.25.

Stocks across Asia dropped on growing fears over the pace of growth in China after a gauge of manufacturing on Friday sapped equity markets on Wall Street and in Europe. China's Shanghai Composite index was down 8.6 per cent in afternoon trading, while Japan's Nikkei 225 index fell 4.1 per cent and Australia's S&P/ASX 200 index declined 3.6 per cent. The dwindling demand for stocks eroded investors' appetite for other risk-sensitive assets, including the kiwi dollar, which is also exposed to China's economy through New Zealand's reliance on exporting to the world's most populous nation.

"We've been sold off with the risk-off tone of equity markets," said Tim Kelleher, head of institutional sales at ASB Institutional in Auckland. "Given equity markets still look like they're going to be heavy for the next two to three days, then kiwi should head back towards support around 65.50 (US cents)."

A BusinessDesk survey of 10 currency analysts predicts the local currency may trade between 64.50 US cents and 68 cents this week. Three expect the kiwi to gain, three say it may fall and four say it will likely remain largely unchanged.

ASB's Kelleher said institutional investors were selling US dollars to cash in gains on the currency and offset some of their recent losses in equities, which had slowed the kiwi's decline.

Investors will look to see whether Chinese policymakers attempt to intervene in the stock market slump after media reported officials had approved efforts to prop up equities. The kiwi dropped to 4.2145 Chinese yuan at 5pm in Wellington from 4.2689 yuan on Friday in New York.

New Zealand's Reserve Bank deputy governor Grant Spencer today said property investors were increasing the risks in Auckland's housing market, with the bank set to impose new mortgage lending restrictions on the country's biggest city from November. Spencer said interest rate increases "are likely to be off the table for some time" as the bank contends with a slowing economy and deteriorating terms of trade.

New Zealand's two-year swap rate was unchanged at 2.84 per cent from last Friday, and 10-year swaps were at 3.52 per cent.

The kiwi was little changed at 91.21 Australian cents from 91.23 cents last week, and dropped to 79.82 yen from 81.53 yen. It declined to 57.50 euro cents from 58.66 cents on Friday in New York, and fell to 42 British pence from 42.56 pence.

-BUSINESSDESK