N.Z. Dollar Trades Near 10-Month Low on Outlook for Economy

By Tracy Withers

Aug. 4 (Bloomberg) -- The New Zealand dollar traded near a 10-month low on speculation the nation's yield advantage will diminish as the outlook for slowing economic growth prompts more interest-rate cuts.

The local dollar is the worst-performer among the 16 most- traded currencies in the past three months, slumping 6.6 percent against the U.S. dollar. It reached its lowest in more than 10 months on Aug. 1 as traders increased bets that Reserve Bank of New Zealand Governor Alan Bollard will cut borrowing costs by as much as half a percentage point next month.

``Things are looking increasingly dreary and this has taken a toll on the New Zealand dollar,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. ``Not only is the New Zealand economy teetering on the brink of recession, but the Reserve Bank is expected to cut interest rates significantly over the coming months.''

New Zealand's currency bought 72.87 U.S. cents at 9:56 a.m. in Wellington from 72.73 cents in late New York trading Aug. 1, when it fell as low as 72.47 cents. It bought 78.47 yen from 78.32 yen.

The currency fell last week after a survey showed a net 8.2 percent of firms expect sales will fall over the next year, adding to signs the economy has stalled. The fifth straight month of pessimism was the worst in the ANZ National Bank Ltd. survey's 20-year history.

Last month, Bollard cut the official cash rate a quarter- point to 8 percent, the first reduction in five years, saying the slowing economy will ease inflation.

`Slow Further'

``There is a risk that the domestic economy will slow further,'' he said in a July 24 statement. Weak growth will curb inflation over the next two years, he said.

The economy contracted 0.3 percent in the first quarter and 9 of 13 economists surveyed by Bloomberg News estimate it also shrank in the three months ended June 30, putting the nation in its first recession since 1998.

The deteriorating outlook for the economy has increased expectations of future rate reductions. The chance of a quarter- point cut at the next review is 128 percent, according to an index calculated by Credit Suisse Group based on swaps trading. A separate index shows the market expects 1.5 percentage points of rate cuts over the next year.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net