Photo / Dean Purcell
The New Zealand dollar plummeted below 84 US cents and stocks are likely to follow a slump on Wall Street and in Europe amid speculation the European sovereign debt crisis may spread to core euro zone countries, forcing central banks to provide more support.
Global equity markets bore the brunt of a massive reversal in investors' appetite for riskier assets, which was triggered when the European Central Bank dashed hopes that it would begin buying Italian and Spanish bonds in a bid to prevent yields rising to unsustainable levels. Instead the bank said would resume sovereign bond purchases from the peripheral euro zone states, such as Ireland and Portugal.
On Wall Street, the Standard & Poor's 500 Index tumbled 4.8 per cent to 1,200.07, its lowest level since November 30, 2010. In Europe, the Stoxx 600 Index fell 3.5 per cent to a one-year low of 243.16, and the 19-commodity Thompson Reuters Jefferies CRB Index fell 2.8 per cent to 327.97.
"When you look at the New Zealand dollar versus the US dollar, on any metric it's over-valued - certainly in the medium-term," said Stephen Toplis, head of research at Bank of New Zealand. "What we're seeing is what it might take to see the New Zealand dollar collapse, and that's a collapse in global economic activity."
So-called safe haven assets saw renewed buying, with reports that New York banks were charging investors to place deposits. Demand for government bonds spiked, with yields on US two-year treasuries at an all-time low, US 10-year treasuries 15 basis lower from yesterday, and yields on Australian three-year bonds trading 30 basis points lower.
The US currency saw renewed buying, as investors hunted for a safe port in the storm, with the Dollar Index, a measure of the greenback against a basket of six major currencies, recently trading 75.11, its highest level in almost a month. That came at the expense of growth currencies such as the kiwi and Australia dollar.
"Investors are getting out of risk as fast as they can and heading towards the US dollar," said David Curd, a forex adviser at directfx.co.nz. "It's basically risk-off across the board with the Aussie, euro, the sterling all tumbling as well."
The kiwi recently traded at 83.57 US cents, down from 85.10 cents yesterday, and fell to 72.81 on the trade-weighted index of major trading partners' currencies from 73.44. It was little changed at 79.85 Australian cents from 79.84 cents yesterday, and fell to 66.36 yen from 67.95 yen. It declined to 59.46 euro cents from 59.66 cents yesterday, and dropped to 51.63 pence from 52.01 pence previously.
The kiwi may trade in a range of between 83.40 US cents and 84.50 cents, Curd said, with the bias towards further declines, and topside moves capped for the time being.