Tuesday, February 19, 2008

Kiwi Dollar Declines as US Slowdown Pours Cold Water over Carry Trade

by Michelle Roberts

The dollar of New Zealand registered a drop last week after gaining for four consecutive days in the market. The drop in the Kiwi dollar is attributed to the sluggish US economy that will hurt global economic growth and undermine the lure of the high earning currencies. The New Zealand dollar is called Kiwi which registered a drop against main 16 currencies when an US index stated that the consumer confidence declined beyond the expectations of economists for the month of February. There was also the fear of the US economic recession which kept investors away from carry trade. In the carry trade, funds are borrowed in those countries that have lower rates of interest and the funds thus borrowed are invested in places that give the investors higher returns on their investments which also include New Zealand. According to currency strategist with Bank of New Zealand Ltd. in Wellington, Danica Hampton, world concerns have kept on affecting the Kiwi and people are wary of the slowdown in the US economy and this reflected in selling of currencies that promised high returns for the investors in the currency market.

The Kiwi dollar bought 78.96 U.S. cents from its earlier 79.03 cents which was recorded on February 15 in the late New York trading. In the last week New Zealand had gained by 0.2%. This picture of Kiwi was before it traded against the Yen. Hampton is of the opinion that when the Kiwi trades against the Yen it may drop as low as 77.50 cents in the current week. The Kiwi has dropped by 1.9% after it registered a 22 year high value in last July. The mounting non-payments in the US subprime loan industry as well as the high risk mortgages prevented the credit amount globally available which took its toll on the New Zealand dollar.

The cut in returns for the financial stocks and retailers are also the reasons cited for the drop in the Kiwi. Investors chose to quit the carry trade holdings owing to the recognized risk that the ups and downs in the currencies will write off all the profit that the investors earned on the two interest rates. The official cash rate of New Zealand’s dollar is 8.5% which is a record rate and it is also the highest after the cash rate of Iceland. This rate of New Zealand stands at the second highest position in the economies that are rated and which makes the Kiwi the most preferred carry trade target among investors. Another reason to worry about the sluggish US economy is that the opening index of consumer sentiment of the Reuters and Michigan University which was declared in the last week also dropped to 69.6% from its earlier 78.4% in January. This index is the lowest in almost 16 years. However the government bonds of New Zealand remained unchanged with the earnings on the 6% note that will be maturing by December 2017. Earnings on bonds move contrary to prices.

 

 

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