Dollar fall 'all about Europe'

The New Zealand dollar took a further tumble over night, dropping through below the 75USc level.

The currency rebounded to 75.01USc just after 9am.

The dollar has been falling steadily over the week but it took a particular tumble in the early hours of Wednesday New Zealand time following a Eurozone summit which produced little to solve the continent’s sovereign debt problems.

“It took all of 24 hours for the traders to realise it wasn’t going to make much difference,” said Bank of New Zealand senior economist Craig Ebert.

“It used to take days. But you can see it is nothing to do with the New Zealand story – not even the dairy announcement made it wobble, and that is an indication this is all about what is going on elsewhere.” The drop in the currency coincided with an announcement by Fonterra that the dairy giant its 2012 payout would be 20c/kg higher than previously forecast.

Mr Ebert said the currency’s fall was driven by a realisation from this week’s EU summit that a solution was no close and by the financial markets’ move to safer havens.

Westpac New Zealand currency strategist Imre Speizer said the drop was “all about Europe, and it has been for weeks.”

“Last night’s move downward was just an extension of the previous night’s downward move, and that was caused by European Central Bank officials saying they’re either not going to do much or they don’t think much will happen in response to the crisis.

“You’ve also got an ECB officials saying again last night they remain opposed to stepping up bond purchases and even saying they are sceptical that they even work. So it doesn’t look like the ECB is coming to the rescue any time soon.”

The flight to “safe havens” was almost totally flying to the United States, he said – hence the drop in the New Zealand currency versus the greenback.

“The ‘scared money’ is now rushing to US treasuries. The New Zealand and Australian government bonds issues are seeing some of that – there is a marked increase in appetites for these denominations.

That appetite has benefited the New Zealand government’s borrowing programme, which is costing the New Zealand taxpayer a lot less than forecast because the demand has pushed the yield down – as the National Business Review reported two weeks ago, the New Zealand government’s 10 year bond rate has dropped below 4% for the first time in living memory.

That demand has in turn stopped the New Zealand dollar from dropping further, he said.