Kiwi dollar jumps above US76c as central banks cut borrowing costs

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The New Zealand dollar jumped more than 2 per cent after the world's largest central banks agreed to cut borrowing costs for European lenders in an effort to contain the region's escalating debt crisis.

The New Zealand dollar rose to 78.22 US cents overnight, from 76.26 yesterday, and was recently at 77.91 cents.

The US Federal Reserve, the European Central Bank and their counterparts in Canada, Britain, Japan and Switzerland jointly agreed to cut interest rates on dollar liquidity swap lines by 50 basis points.

The move was designed to improve the availability of credit for businesses and households in Europe and will give participating banks easier access to euros, British pounds, Japanese yen, Swiss francs and Canadian dollars.

"There was a massive surge in risk appetite overnight" following the concerted central bank action, said Mike Burrowes, market strategist at Bank of New Zealand. "While the reaction overnight was dramatic, this action will not be the panacea to the world's ills."

Markets welcomed the initiative, the Dow Jones Industrial Average rose 3.3 per cent, the Standard & Poor's 500 Index climbed 3.4 per cent, while the Nasdaq Composite Index rose 3.3 per cent. In Europe, the Stoxx 600 Index finished the session with a 3.6 per cent gain. The euro also benefited, rising 1 per cent to $1.35.

Burrows said it is still a risk on, risk off environment. "There will be another realisation from markets that it doesn't change anything"- Europe's debt fears will continue, he said.

The New Zealand Institute of Economic Research said in a report today that Europe's crisis meant there is now a 25 per cent chance that the euro region will be broken up and New Zealand firms should prepare for "another global financial crisis" if it happens.

The institute's latest Quarterly Predictions, published today, say the weakening global economy will depress exports and tourism arrivals anyway, restricting growth to just 1.5 per cent in 2012, with a slow recovery to 2.5 per cent growth in 2013.

If the euro zone crisis plays out badly with a break-up of the euro, "New Zealand would likely experience another recession and the Reserve Bank would need to cut interest rates," the institute said.

The Overseas Trade Indexes (volumes and prices) for the third quarter are due for release today, which will provide clues to the extent that Europe's woes are denting global demand for New Zealand products.

The kiwi rose to 57.98 euro cents from 57.25 cents yesterday, it was at 49.62 British pence from 48.9 pence and rose to 60.35 yen from 59.4 yesterday. It fell to 75.93 Australian cents from 76.12 yesterday.

The trade weighted index rose to 68.84 from 67.95.