Kiwi falls as Cyprus rejects bank tax, local data and Fed loom

The New Zealand dollar fell against the greenback and gained against the euro after the Cyprus parliament rejected a bank tax proposed as part of a European Union bailout, leaving the rescue plan in disarray and denting risk sentiment.

The kiwi fell to 82.33 US cents from 82.53 cents at 5pm in Wellington yesterday. The local currency rose to 63.96 euro cents from 63.70 cents.

Cyprus spurned the EU's conditions in the face of anger among its citizens at the prospect their bank deposits would be raided, leaving the tiny nation at risk of financial failure.

While Cyprus and the 10 billion euro bailout is a only a small part of the EU, investors fret it may set a precedent for wider turmoil. Risk assets such as stocks, the kiwi and Australian dollars weakened.

"The Cyprus situation is dragging on the euro – it is unclear as to how the stalemate will be resolved," says Alex Sinton, senior dealer at ANZ New Zealand. The kiwi and Australian dollars fell as uncertainty over Cyprus sent investors back to the relative safety of the greenback.

The kiwi may trade in a range of 82.15 US cents to 82.70 cents today, he says.

Global events may overshadow local data over the next two days. The balance of payments for the fourth quarter is due out this morning and is expected to show the annual current account deficit widened to $10.28 billion, or 4.9 percent of gross domestic product, from 4.7 percent three months earlier, based on a Reuters survey.

GDP follows tomorrow, with growth of 0.9 percent seen for the fourth quarter, up from 0.2 percent in the third quarter, for an annual pace of 2.4 percent.

The data "is probably supportive but historic", Mr Sinton says.

Dairy product prices surged 14.8 percent to a two-year high in the latest GlobalDairyTrade auction overnight, though traders say this reflects drought in the North Island, which has curbed output, so was not such a boon to the domestic economy.

Traders are looking ahead to the Federal Open Market Committee review of US interest rates tomorrow.

Fed chairman Ben Bernanke's comments about the strength or otherwise of the world's biggest economy will be keenly watched. Should he paint a rosier picture of US growth, it may lift the greenback as investors start to price in an end to quantitative easing.

The trade-weighted index fell to 75.88 from 75.94 late yesterday. The kiwi traded little changed at 79.45 Australian cents and fell to 78.20 yen from 78.85 yen. It slipped to 54.55 British pence from 54.64 pence.

(BusinessDesk)