By BRIAN FALLOW
The New Zealand dollar barely held on to its weekend gains yesterday as the markets awaited the next move by the big powers to support the euro.
The kiwi had gained about half a cent to US41.3c over the weekend in the wake of concerted intervention by the European, United States, Japanese and Canadian central banks to buy the euro. The intervention pushed the euro up 4c to US90c before it consolidated around 88c, a level it held through local and Asian trading yesterday.
The New Zealand dollar firmed to US41.5c yesterday before slipping back to end the day around 41.3c again.
"We have seen buying from local exporters today mainly because they perceive a temporary bottom for the kiwi as it has been trading closely correlated with the euro for some time," said Citibank dealer Dean Sheridan.
Bank of New Zealand foreign exchange manager Greg Ball said: "The markets don't know which way to play it, because whilst we are getting an intervention, [US Treasury Secretary Lawrence] Summers is saying that the US still has a strong-dollar policy."
At this stage the intervention seemed a bit fragile and US support for it lukewarm, Mr Ball said.
Friday's intervention, thought to have cost between $US3 billion ($7.2 billion) and $US5 billion, gained extra credibility from its including the US Federal Reserve.
It was followed up by a statement from the Group of Seven (G7) leading industrial powers, meeting in Prague, who said they were acting out of "shared concern for the potential implications of recent movements in the euro for the world economy."
The euro has fallen relentlessly since its launch at the start of last year, losing more than 25 per cent of its value, and over the past three months the New Zealand and Australian dollars have moved in locked step with it.
While G7 policymakers may have acted in concert, the markets noted differences in their comments. European Central Bank president Wim Duisenberg talked about the "orderly reversal" of the euro's decline.
But Mr Summers was at pains to stress that the policy of a strong dollar being good for the United States remained intact.
However, the strong dollar has helped to push the US current account deficit to about 4.5 per cent of GDP, while a string of big US companies have recently bemoaned exchange-rate impacts on their earnings.
Further intervention to support the euro would be needed, said local dealers.
"It's critical," Mr Sheridan said.
"If they don't follow through and get the euro above 90c within the next 24 or 48 hours, the market will take them on and it will be at 82c by the end of the week."
Mr Ball said the central banks had a huge task on their hands.
"Offshore funds are very long [on] euros and have been for a long time, in some cases since the launch of the euro, so any liquidity the central banks' intervention provides may be used by the funds to exit long positions."
And given the fundamental relative attractiveness of US over European assets, capital would continue to flow out of euros into US dollars, Mr Ball said.
But even though it might cost the G7 central banks a lot more than they initially thought, history suggested they would win the battle.
If Friday's intervention does mark a turning point for the euro, dealers do not expect the New Zealand dollar to fully match its recovery.
"We will probably decouple," Mr Sheridan said. "We won't recover to the same degree as the euro because growth rates are not so good here, there are policy concerns and, of course, the current account deficit.
"We might go to [US]43c, 44c, 45c maybe, but it is not going to happen in a hurry."
Mr Ball suspected the kiwi would also underperform the aussie.
"We are targeting A71c within the next six months [from 75.6c yesterday]."
Rescue of euro not enough for kiwi
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