Kiwi retreats as Spanish optimism fades, Wall Street slides

BUSINESSDESK: The New Zealand dollar fell more than half a US cent as optimism over Spain's 100 billion euro lifeline faded after questions over who is going to pay for the bailout, sapping investor confidence and pushing stocks on Wall Street lower.

The kiwi fell to 76.87 US cents at 8am from 77.65 cents yesterday at 5pm. The trade weighted index declined to 70.15 from 70.48.

Stocks on Wall Street fell as investors reassessed the plan to bailout Spain's banking system, with the Standard & Poor's 500 index dropping 1.3% to 1308.93.

European policymakers are yet to clarify whether the loan granted to shore up Spain's banks will come from the region’s permanent support fund, the European Stability Mechanism or its temporary European Financial Stability Fund.

"Overnight we have seen various calls from Germany and Finland that the money should come from the European Stability Mechanism," said Stuart Ive, currency strategists at HiFX.

"The New Zealand dollar is taking its lead from overseas and it means we are seeing a risk-off scenario.

"At the moment the kiwi has the potential to go as low as 76.20 US cents and there will be more risk towards the end of the week with the Greek elections."

Spain’s rescue comes a week before Greece’s second round of elections on June 17.

The result will be closely watched by markets in the event voters deiced to elect a government that decides to leave the region’s shared currency.

The package has also moved Italy into the front line over concern it may be next to succumb to the debt crisis. 

The yield on Italian 10-year government bonds rose 27 basis points to 6.04%, the biggest daily rise since December 8, according to Bloomberg.

Germany, the Netherlands, Austria and Italy will all sell government bonds this week.

The Netherlands will sell up to 2.5 billion euros of 2033 bonds tomorrow, while Germany is set to offer 5 billion euros of 2022 bonds on Thursday.

New Zealand's accommodation survey for April and electronic card transactions for May are scheduled for release by Statistics New Zealand this morning.

The New Zealand dollar was little changed at 77.87 Australian cents from 77.81 yesterday.

The kiwi rose to 61.56 euro cents from 61.45 cents and dropped to 49.64 British pence from 49.90 pence. It sank to 61.04 yen from 61.83 yen.