NZ dollar falls below 87c as fear swamp markets

Photo / Dean Purcell

The New Zealand dollar fell below 87 US cents on the back of weaker equity markets as investors refocused their attention on the stumbling US economy and Europe's sovereign debt crisis.

The smooth passage of the US debt deal through the Senate did little to sooth investors' fears that the world's biggest economy may be faltering.

On Wall Street, the Standard & Poor's 500 Index fell for a seventh day, with the exchange shedding 2.4 per cent to 1,254.82 on the back of weaker than expected consumer spending numbers, which fell for the first time in nearly two years.

"The US debt ceiling issue is now over and done with, and thank God for that, but the focus is now turning back to the same old problems," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "People are taking risk off the table and equities are getting hammered, so it's not surprising that the kiwi and Aussie are falling on the back of that," he said referring to the trans-Tasman currencies colloquially.

European stocks were also under pressure with the Stoxx 600 Index falling 1.9 per cent to 256.98 after yields at the latest Italian bond auction shot up, sparking fresh fears that the country may be dragged into the euro zone debt crisis.

The yield on Italian 10-year government bonds rose 13 basis points to 6.14 per cent having earlier touched on a 14-year high of 6.25 per cent. Italy is Europe's biggest bond market, and has the second highest debt to GDP ratio in the euro zone after Greece.

"It's one thing to bailout the smaller peripheral euro zone countries, but with Italy, the current mechanism will just not be able to cope," Goh said. "The renewed jitters in Europe might prompt people to reassess the kiwi, and if we keep getting risk off as week progresses, I think we'll see a lot speculators bail out on their long positions."

The kiwi recently traded at 86.81 US cents, down from 87.38 cents yesterday, and fell to 74.47 on the trade-weighted index of major trading partners' currencies from 74.84.

It was little changed at 80.26 Australian cents from 80.27 cents yesterday, and fell to 66.95 yen from 67.43 yen. It declined to 61.18 euro cents from 61.56 cents yesterday, and slipped to 53.27 pence from 53.64 pence previously.

The average winning price at the GlobalDairyTrade auction fell 1.3 per cent to US$3,716 per tonne. Prices for whole milk powder eased 0.3 per cent, offsetting moves for other dairy products.

The kiwi may trade between a range of 86.44 US cents and 87.20 cents, Goh said, with the currency likely to undergo further consolidation.