Dollar may still bounce

08-02-2010 | Alan Williams

The New Zealand dollar is showing signs of a longer term downward trend, but might have one last show of strength before that sets in, says BNZ currency strategist Mike Jones.

The kiwi has lost 7.5% in value since mid-January against the United States dollar, falling to US$0.6867 late last Friday morning, from 0.7050 a week earlier and 0.7420 on January 16.

Risk aversion among investors has dominated the market - due to official moves in China to slow down credit growth, then fears over sovereign debt issues in the Euro zone countries Greece, Portugal, and Spain.

Overlaying this main trend is weaker NZ data, with unemployment at a decade high level, although a Reserve Bank interest rate rise is still expected mid-year.

Jones says the BNZ view is that the global concerns will ease eventually and that the United States economy will confirm its growth, requiring a Fed interest rate rise in mid-year or not long afterwards.

"We think the kiwi has some life in it yet and that it will range between 0.70 and 0.75c through to mid-year, but then as the US growth trend kicks in it will move towards the mid-60s by year end.''

Jones described the kiwi as a "mixed bag'' on the other major cross-rates. With weakness in the Euro zone he expects the dollar to lift to the E0.53 to 0.54 mark from E0.5001 on Friday.

Risk aversion has seen the dollar drop to Y61.13 from 67.75 in mid-January, but Jones said that the Japanese economy is weak, and the kiwi will move higher.

With the UK in better shape, it is a different story against sterling, where he says the dollar has peaked and could slip from its stg0.4358 on Friday to 0.42 by mid-year and stg0.40 by year end.

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