KEY POINTS:
A further rebound in equity markets today propelled the kiwi dollar as appetite for risk increased.
A third straight day of gains in equities markets emboldened investors to take chances, prompting use of the low-yielding yen to buy assets in higher-yielding currencies like the kiwi in carry trades.
Stock markets moves are currently regarded as a barometer of risk appetite, and financial markets have calmed after swinging wildly earlier in the week on an emergency interest rate cut by the Federal Reserve and escalating fears of a US recession.
By the close, the kiwi had eased off from its US77.50c high to US77.14c but it was still nearly a cent higher than its US76.28c close yesterday.
Comments by Reserve Bank governor Alan Bollard that the kiwi was still overvalued took some of the gloss off the kiwi.
But he downplayed the warnings of some economic commentators about inflationary pressures coupled with low economic growth.
He scotched some of the more dramatic forecasts made in recent days by economists at Westpac, Infometrics and interest.nz.com that rates will probably have to be lifted again this year.
Dr Bollard said that he was satisfied the measures the bank had already taken were having their desired effect.
He had not changed his outlook as a result of recent turmoil on financial markets.
The turmoil had not yet translated into signs of recession. In any case, New Zealand was "well positioned" as a neighbour of Australia and South East Asia.
The kiwi lost ground on the aussie, dropping to A87.32c from A87.99c at the opening. It closed yesterday on A87.45c.
But it gained on the yen, rising to 82.72 from 81.08 and the trade-weighted index closed on 71.16 from 70.56.
In major currency action, the euro was supported after tough inflation talk by European Central Bank officials dashed speculation of a possible euro-zone interest rate cut, even as the Federal Reserve is expected to slash rates further.
Analysts said it was too early to tell if calm had been restored to markets.
"It's too early to tell if risk demand is going to recover completely," said Junya Tanase, a forex strategist at JPMorgan Chase Bank in Tokyo, adding that next week would be key in gauging just how sluggish the US economy is.
The Fed holds a policy meeting next week, and is seen cutting rates by up to 50 basis points after a 75 basis point cut to 3.5 per cent at an emergency meeting this week.
Analysts also said the market was anticipating a raft of crucial economic indicators, including readings of US employment and manufacturing.
- NZPA
