NZ dollar dips as Euro debt fears resurface

Photo / Dean Purcell

The New Zealand dollar fell against the greenback, with US financial markets closed for the Labor Day holiday and European equities tumbling amid fears that German political support for the bailout of indebted euro zone states is eroding.

The New Zealand dollar recently traded at 83.14 US cents, down from 84.03 cents yesterday, and fell to 71.79 on the trade-weighted index of major trading partners' currencies from 72.48 previously.

European equities were routed overnight after German Chancellor Angela Merkel's party suffered its fifth election loss this year, sparking fresh fears that Social Democrats are losing sway with voters who are increasingly critical of her government handling of the European bailouts.

Europe's Stoxx 600 Index, a benchmark covering large to small cap stocks across 18 countries in the European region, fell 4.1 per cent to 223.45, its biggest two day drop since March 2009 according to Bloomberg.

Doubts around the viability of European leaders to respond to further debt crises saw the single currency fall to US$1.4089, from US$141.43 yesterday, as investors fled for the perceived safety of the US dollar and other hedge assets.

The Dollar Index, a measure of the greenback against a basket of six major currencies, rising to 75.19, its highest level since July 19, and gold rose to US$1900.05, near its historic highs, from US$1892.69 yesterday. That came at the expense of growth-linked currencies, with both the kiwi and the Australian dollar coming off the boil.

The mood on global equity markets looks deeply negative, with US stocks poised for a sharp fall when they open on Tuesday. Standard & Poor's 500 Index futures recently traded 28.6 basis points lower at 1,145.70.

"It's hard to imagine how sharply lower the US markets will drop later tonight," said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional. "If nothing improves in Europe overnight the kiwi might head to the bottom of the ranges with support around 80 to 82 US cents."

On the crosses, the kiwi recently traded at 78.80 Australian cents, down from 79.36 cents yesterday, and fell to 63.89 Japanese yen from 64.59 yen previously. It dropped to 58.98 euro cents from 59.46 cents yesterday, and slipped to 51.61 pence from 52.11 pence previously.

Locally, the kiwi/Australian dollar cross rate will be in the spotlight, with the Reserve Bank of Australia expected to keep interest rates on hold at 4.75 per cent when it meets later today.

Economists are betting the recent global market turmoil will force the bank to trim its hawkish view. The central bank is seen cutting rates by 127 basis points in the next 12-months, according to Overnight Index Swap curve.

The kiwi may trade between a range of 82.70 US cents and 83.40 cents, Kelleher said, with the bias towards the down side.