New Zealand Dollar Falls as Oil Drop Spurs U.S. Currency Demand

By Ron Harui and Tracy Withers

Sept. 2 (Bloomberg) -- The New Zealand dollar fell for a third day as declining oil prices buoyed the U.S. currency and investors reduced holdings of higher-yielding assets.

The local dollar dropped to the lowest in almost a week as oil prices slid to a four-month low after Hurricane Gustav made landfall in the U.S. Gulf Coast as a weaker-than-expected storm. The New Zealand dollar also fell to a two-week low against the yen as a slide in stocks prompted traders to trim so-called carry trades financed in the Japanese currency.

``Higher risk aversion levels and a market comfortable buying the U.S. dollar ensured the New Zealand dollar suffered,'' said Khoon Goh, a senior economist at ANZ National Bank Ltd. in Wellington. ``The U.S. dollar is back in favor, if only by default.''

New Zealand's currency fell 0.7 percent to 69.22 U.S. cents as of 12:19 p.m. in Wellington from 69.69 cents late in Asia yesterday. It reached 69.19 cents, the lowest since Aug. 27. The currency dropped 0.4 percent to 74.84 yen. It touched 74.69 yen, the weakest since Aug. 13.

New Zealand's dollar is a favorite target for the so-called carry trade, in which investors get funds in a country with lower borrowing costs and buy assets where returns are higher. New Zealand's 8 percent benchmark interest rate compares with the Bank of Japan's target lending rate of 0.5 percent.

Stocks Decline

The risk to the carry trade is that currency moves can erase the profits and investors typically become more averse to the strategy when stocks decline. Europe's Dow Jones Stoxx 600 Index slipped 0.4 percent yesterday and the MSCI Asia Pacific Index lost 2.1 percent.

The New Zealand dollar also fell on speculation central bank Governor Alan Bollard will cut rates at his next review on Sept. 11 as the economy slows. Fourteen of 15 economists surveyed by Bloomberg News expect a quarter-percentage point cut and one expects a half-point reduction.

The economy contracted in the first quarter and will probably shrink in the second and third before showing some growth in the final three months of the year, the New Zealand Institute of Economic Research Inc. said in a report today.

New Zealand government bonds were little changed. The yield on the benchmark 10-year note held at 5.99 percent and the yield on the three-year security was at 6.05 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Tracy Withers in Wellington at twithers@bloomberg.net