N.Z. Dollar Falls to 10-Month Low

New Zealand's dollar fell to a 10- month low on concern U.S. subprime-mortgage losses will spread to the South Pacific nation, increasing the chance the central bank will cut interest rates further this year.

The local dollar fell for a third day after New Zealand Guardian Trust Co. suspended investments and withdrawals from one of its funds, damping optimism the financial sector will weather the global credit-market crisis. Traders are betting the Reserve Bank of New Zealand will lower its benchmark by 1.32 percentage points in the next 12 months, up from 1.29 points on July 24 when the central bank lowered rates, a Credit Suisse Group index showed.

New Zealand's dollar fell 0.2 percent to 73.89 U.S. cents as of 12:17 p.m. in Wellington, from 74.06 cents late in Asia yesterday. It earlier touched 73.47 cents, the lowest level since Sept. 26. The currency bought 79.82 yen, from 79.76 yen.

The kiwi has weakened 3.3 percent this month, the worst performer of the 16 most-traded currencies versus the U.S. dollar, on speculation further rate reductions will make the currency less attractive to overseas investors. The RBNZ lowered its official cash rate to 8 percent on July 24, from 8.25 percent, and said further cuts were likely.

New Zealand's benchmark interest rate compares with 2 percent in the U.S. and 0.5 percent in Japan, making the currency a favorite target for so-called carry trades.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is currency market moves erase those profits.

N.Z. Dollar Falls to 10-Month Low

TradingEconomics.com, Bloomberg
7/29/2008 8:25:28 PM