KEY POINTS:
The New Zealand dollar bounded back over US80c today as equity markets recovered and investors decided they could handle more risk.
Earlier, the kiwi fell heavily amid the turmoil engulfing world markets. It hit multi-month lows against the yen and euro but then recovered across the board, including rising half a cent against the Australian dollar.
The global financial chaos substantially increases risk aversion, leading many participants to further scale back exposure to fringe markets such as the kiwi dollar, ANZ bank said today. But as equity markets recover, that trend reverses.
The kiwi closed on US80.25c, compared with its US79.55c opening.
Against the Australian dollar it ended on A87.26c compared with A86.74c at the opening.
Analysts said the US dollar was susceptible to more declines on worries about the US financial system.
The dollar plunged yesterday after the Federal Reserve took the emergency step of cutting its discount rate on Sunday and opened up discount window lending to major investment banks, a tool not used since the Great Depression in the 1930s.
The steps, which accompanied JPMorgan Chase & Co's decision to buy stricken rival Bear Stearns at a rock-bottom price of US$2 a share, was seen as highlighting the depths of the damage caused by the tumult in credit markets and sparked a dollar sell-off.
The market was in a wait-and-see mode ahead of a Fed policy meeting and quarterly earnings announcements by US investment banks Goldman Sachs and Lehman Brothers later on Tuesday.
The Federal Reserve is widely expected to cut interest rates by 1 percentage point to 2 per cent at a policy meeting tomorrow and investors see a small chance of an even deeper cut.
US short-term interest rate futures show that investors see a roughly 10 per cent chance of the Fed cutting interest rates by 1.25 percentage point. The chances of a 1 percentage point cut are seen at roughly 90 per cent.
Such a huge cut will accentuate the rate differential for the kiwi, with New Zealand's official cash rate at 8.25 per cent.
"The dollar could come under pressure if the size of the Fed rate cut turns out to be 75 basis points and that leads to a fall in US share prices," said the trader for a Japanese trust bank.
But investors are also watching to see if the Fed will come out with any extra steps in addition to lowering interest rates, the trader said.
The New Zealand dollar trade-weighted index closed on 70.93 against 70.96 at the same time yesterday.
Currency rates:
NZ dlr/US dlr US80.25 US80.55c
NZ dlr/Aust dlr A87.26c A87.20c
NZ dlr/euro 0.5086 0.5086
NZ dlr/yen 77.80 77.95
NZ dlr/stg 40.47p 39.99p
NZ TWI 70.88 70.96
Australian dollar US91.99 US92.46c
Euro/US dollar 1.5783 1.5839
US dollar/yen 96.97 96.77
- NZPA
- NZPA
