New Zealand Dollar May Fall

The New Zealand dollar, little changed today, may fall as weaker U.S. stock markets prompt investors to avoid the risks posed by the carry trade., Bloomberg 1/27/2008 3:53:41 PM

The Standard & Poor's 500 Index fell on Jan. 25, extending it loss this year to 9.4 percent on concerns the U.S. economy may not avoid recession. Those fears deterred investors from the carry trade, where funds borrowed cheaply in countries with lower interest rates are invested in places like New Zealand, where the returns are higher.

The currency bought 76.80 U.S. cents as at 9:45 a.m. in Wellington from 76.79 cents in late New York trading on Jan. 25. The currency traded as high as 77.52 cents late last week. New Zealand's dollar bought 81.94 Japanese yen from 81.97 on Jan. 25.

The currency has declined from a 22-year high reached in July as rising defaults in U.S. subprime, or high risk, mortgages crimped the amount of credit available worldwide and slashed earnings for financial stocks and retailers. Investors exited carry trade holdings because of the perceived risk that the currencies' fluctuations can erase the profit earned on the two rates of interest.

New Zealand's record 8.25 percent benchmark rate is the highest after Iceland's among Aaa rated countries making its currency a popular carry trade target. The rate is 4 percentage points higher than the U.S. benchmark and 7.75 points more than Japan's.

Reserve bank Governor Alan Bollard last week kept the nation's official cash rate unchanged and said ``a period of restraint'' is needed before considering rate cuts.

New Zealand Dollar May Fall