NZ dollar drops as Spanish yields soar

The New Zealand dollar fell near a two-week low as the yield on Spanish 10-year government bonds rose to a record high amid fears Europe's debt woes are becoming more contagious, sapping investors' appetite for riskier assets.

The kiwi fell to 78.87 US cents at 8am in Wellington from 79.40 cents yesterday. The trade-weighted index dropped to 71.68 from 72.07.

The yield on Spain's benchmark government bond rose as high as 7.57 percent after the Spanish and Italian governments reinstated bans on betting against stock declines.

That came as stocks on Wall Street and in Europe fell after Catalonia added its name to the list of Spanish regions that may need a central government bail-out. Wall Street's Standard & Poor's 500 Index fell 0.9 per cent, Germany's DAX 30 sank 3.2 per cent and France's CAC 40 dropped 2.9 per cent.

"If 7 (per cent bond yields) is terrible then 8 must be catastrophic," said Alex Sinton, director institutional FX at ANZ New Zealand. "That was enough to drag the kiwi and Aussie lower," he said referring to the trans-Tasman currencies colloquially.

The kiwi may trade in a range of between 78.55 US cents and 79.30 cents today, with exporters keen buyers at these levels, Sinton said. On a longer basis, Sinton said the currency may trade between 75 cents and 82 cents as the long-term moving averages creep up and attract interest from investors with extended horizons.

Traders will keep an eye on the HSBC Chinese Flash PMI today as they continue to monitor the health of the world's second biggest economy. Slowing Chinese growth has pared back investors' appetite for risk-sensitive assets, including those in nations directly exposed to that economy such as Australia and New Zealand.

New Zealand's Reserve Bank will review the official cash rate on Thursday and is expected to keep it unchanged at 2.5 per cent.

"They could highlight the Europe more," Sinton said.

The New Zealand dollar fell to 61.82 yen from 62.07 yen yesterday, and declined to 76.73 Australian cents from 76.95 cents. It dropped to 65 euro cents from 65.53 cents yesterday, and decreased to 50.82 pence from 50.97 pence.