Dollar Watch

26-07-2010 | Alan Williams

A wider interest rate gap between New Zealand and the United States looks certain after a gloomy report on the US economy from Federal Reserve chairman Ben Bernanke.

This will provide a boost to the kiwi dollar, but it could still likely to head lower going into year end as investors continue to fret over a fragile world economy, said CBA Bank vice president of institutional banking and markets in Auckland, Tim Kelleher.

The dollar swung from below US$0.71 on Thursday after Bernanke's comments jangled nerves, to 0.7246 on late Friday morning after strong corporate earnings drove US stock prices higher, and before that some encouraging manufacturing and services date out of Europe.

Kelleher thinks that 0.73 to 0.74 will put a cap on the kiwi and the uneven risk appetite among investors could still see it at round the 0.68 level by year end. The market went into the weekend waiting for the results of "stress tests'' on European banks.

He said that Bernanke's comment that the Fed is prepared to do what it takes to stabilise the US economy effectively ruled out interest rate increase starting later this year, as the market had been expecting. This has now been put back at least till early to mid next year.

In the meantime, the CBA believes there will be a second 25 basis point rise in the NZ Official Cash Rate by the Reserve Bank this Thursday, as it takes away the emergency rate levels of the last two years. Despite weakish migration and housing figures, NZ's economy is benefiting from good growth among our Australian and Asian trading partners.

The dollar maintained its strength against the euro and sterling last week, and Kelleher says this will continue into the end of the year, with those economies still weak. He expects the kiwi to move to E0.59 from 0.5623 on Friday, and to remain round the stg0.4749 level. For the yen cross, he's looking at Y64.5 from Friday's Y63.08.

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