Dollar drops as sliding equity markets sap demand for risk-sensitive assets

The New Zealand dollar fell as weak equity markets around the world sapped demand for risk-sensitive assets, though the prospect of higher interest rates will likely give the local currency support.

The kiwi dropped to 86.39 US cents at 5pm in Wellington from 86.84 cents at 8am and 87.17 cents yesterday. The trade-weighted index sank to 80.02 from 80.83 yesterday.

Stock markets across Asia followed Wall Street lower as investors dumped their stakes in biotech and internet industries amid growing concern rising sales won't translate into actual profits. The weakness in equity markets prompted investors to chase 'safe haven' assets such as government bonds with strong demand at an auction for US$13 billion of US Treasuries.

"Global equities are all lower, with the Nasdaq down over 2 percent - everything is off quite sharply in equity markets," said Michael Johnston, senior dealer at HiFX in Auckland. "The TWI is still fairly high, and it's difficult to see that falling a lot more unless we see risk aversion gather steam."

The prospect of rising interest rates has underpinned support for the kiwi, with traders pricing in a 98 percent chance of a hike on April 24 when the Reserve Bank next reviews policy, according to the Overnight Index Swap curve. Government figures showed food prices fell 0.3 percent in March ahead of next week's consumers price index for the first quarter, which will give a clearer steer on how local inflation is tracking.

New Zealand's property market is showing signs of slowing, with a 10 percent drop in the volume of sales in March from a year earlier, according to Real Estate Institute of New Zealand data. While the median sale price rose to a new record, turnover at the lower end of the market has dried up since the central bank imposed limits on mortgage lending with small deposits.

The local currency is heading for a 0.5 percent increase this week from 85.97 US cents at the close of trading in New York last week. The TWI is largely flat from 80.03 last Friday.

A BusinessDesk survey of 11 traders and strategists on Monday predicted it would trade between 84 US cents and 87 cents this week. Six predicted the kiwi would fall this week, one expected it to gain and four saw it largely unchanged.

The kiwi extended its decline against the Australian dollar after figures yesterday showed an unexpected fall in the unemployment rate to 5.8 percent across the Tasman. The local currency fell to 92.13 Australian cents from 92.61 cents yesterday.

The local currency dropped to 87.79 yen at 5pm in Wellington from 88.81 yen yesterday, and declined to 62.17 euro cents from 62.94 cents. It decreased to 51.51 British pence from 51.86 pence yesterday.

(BusinessDesk)