Kiwi drops as fears grow of new slump

Growing fears the second leg of the so-called "double dip" is hitting world markets are responsible for driving the New Zealand dollar off recent highs even as questions grow over the reliability of the United States dollar as a "safe haven" currency.

Having reached as high as US76.30c two weeks ago as global equities continued to rally spectacularly off March lows, the New Zealand dollar fell swiftly in recent sessions.

It dipped to US71.50c yesterday before closing at US72.19c as further risk-aversion swept global markets, sparked by news that CIT Group, a US lender to small and medium-sized businesses, had filed for bankruptcy.

Lacklustre US personal spending and consumer confidence data and a weak US stockmarket on Friday have also been weighing on the kiwi.

After hitting a string of fresh 15-month highs in defiance of fundamentals, the kiwi's fall is not entirely unexpected.

"We've been trying to pick the top for many, many weeks and getting it wrong but it was just a matter of time until the inevitable correction kicked off," Westpac senior markets strategist Imre Speizer said yesterday.

"The first signs of it were a week ago. That's when the S&P 500 made its turn and then a whole bunch of other asset classes had their day as well.

"There was definitely a picture emerging when you put it all together that it was highly likely that a substantial correction was about to unfold."

Expectations of a "W" shaped recovery from the financial crisis faded this year as markets continued to rise, stimulating demand for growth currencies like the kiwi.

"That morphed into a 'V', now it's reverting to a 'W',"said Speizer.

"It's still early days and I wouldn't say the majority of the market buys into the idea we're going to see a significant reversal, but there's enough evidence there to suggest that this is the beginning of it."

And while fears of further economic problems fuel demand for the safe haven of US dollar holdings, the greenback's status as the world's pre-eminent reserve currency is increasingly under siege.

Prominent local fund manager and recent appointee to the Securities Commission, Simon Botherway, this week indicated he has doubts the US dollar can maintain this status.

In a lively email discussion about the volatility of the New Zealand dollar initiated by the Shareholders' Association's Bruce Sheppard, Botherway spoke about the US dollar's status as reserve currency now being a "pretence" given the "massive and totally unprecedented expansion" in its money supply.

"It's not the safe haven it once was because you've got the Fed printing money and what they've done to base money supply," he told the Herald yesterday.