NZ dollar falls as Wall Street sinks

Troubles in the US have been pushing the New Zealand dollar down. Photo / Mark Mitchell

The New Zealand dollar extended its decline against the greenback after a global equity and commodity markets slumped in reaction to the US credit downgrade.

Western equity markets fell sharply in a continuation of the selloff that began in Asia yesterday, with investors looking to limit their risk exposure after the US credit ratings downgrade over the weekend.

Sentiment was dented further after Standard & Poor's cut the credit rating of US government clearing houses and mortgage agencies by one notch to AA.

On Wall Street, the Standard & poor's 500 Index plummeted 6.6 per cent to an 11-month low of 1,119.68, Europe's Stoxx 600 Index tumbled 4.1 per cent to 228.98, and the 19-commodity Thompson Reuters Jefferies CRB Index dropped 2.8 per cent to 317.74.

"The world is still trying to figure out what market looks like with the US on a double-A rating," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "Equity markets' reaction to the downgrade is weighing on kiwi and Aussie as well, and commodity prices are also being watched because they are also getting hit hard," he said.

Demand for safe haven assets continued to surge overnight as gold reached a fresh high of US$1,712.39 an ounce, and yields on the benchmark US 10-year Treasuries fell as much as 23 basis points to a two-year low of 2.32 per cent.

"If you look at the two major currencies, the US dollar and the euro, they don't look so attractive right now," Goh said. "And with the Swiss franc and the yen, authorities are active and warning about further appreciation in their currencies. That's why gold has continued to go up - think of it as the other alternative currency that no one is going to intervene in."

The kiwi recently traded at 82.71 US cents, down from 82.97 cents yesterday, and rose to 71.68 on the trade-weighted index of major trading partners' currencies from 71.60. It gained to 80.48 Australian cents from 79.93 cents yesterday, and fell to 63.89 yen from 64.60 yen. It declined to 58.09 euro cents from 59.79 cents yesterday, and dropped to 50.46 pence from 50.51 pence previously.

Yields on Italian and Spanish government bonds fell almost 1 per cent overnight after the European Central Bank stepped in and began buying debt securities in the latest attempt to deal with the euro zone debt crisis. It is estimated the ECB bought close to 2 billion euros in Italian and Spanish debt in a broadening of its controversial bond buying programme.

The market will look to the Federal Reserve's policy meeting to see what measures the central bank is likely to implement down the track to jolt the US economy out of its downward track. The meeting takes place tomorrow morning New Zealand time.

Goh said the kiwi may trade between 81.80 US cents and 83.10 cents, with the bias towards further declines.