New Zealand Dollar Declines on Outlook for Prolonged Recession

By Tracy Withers

Sept. 9 (Bloomberg) -- The New Zealand dollar declined amid signs that the economy won't recover from a recession until late this year, increasing the likelihood of more interest rate cuts.

A report yesterday showed homebuilding fell for a third quarter, another indication the economy contracted in the second quarter. Separately, the Treasury Department said it couldn't rule out a contraction of gross domestic product in the three months through Sept. 30.

``Construction activity slumped, which saw our economists revise down their GDP forecasts,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. The bank expects that the economy contracted 0.3 percent in the three months ended June 30.

New Zealand's currency fell to 67.03 U.S. cents at 9:48 a.m. in Wellington from 67.30 cents in late Asian trading yesterday. Earlier, it fell as low as 66.48 cents. The currency also slid to 72.52 yen from 73.24 yen.

Construction adjusted for inflation fell 5.8 percent from the first quarter, Statistics New Zealand said in a report yesterday. Residential building declined 7.3 percent and commercial construction dropped 3.6 percent.

``We maintain our view that the economy contracted in the June quarter,'' the Treasury department said in a statement posted on its Web site. ``We are not ruling out the possibility of a further small fall in the September quarter.''

13 Percent Drop

The currency has slumped 13 percent the past three months and last week dropped to a 20-month low at 65.94 cents.

Reserve Bank Governor Alan Bollard will cut the benchmark interest rate for the second time in six weeks at his Sept. 11 review, according to all 14 economists surveyed by Bloomberg News. Traders expect the rate will fall to 6.5 percent within a year, according to swaps trading.

Hampton said the tone of Bollard's statement is likely to be consistent with further rate cuts at the two remaining reviews this year.

Weighing on the New Zealand currency, the U.S. dollar traded near the highest level since October against the euro after the U.S. government's takeover of Fannie Mae and Freddie Mac boosted confidence in global financial markets.

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