Dollar falls to 3-year low as investors favour greenback, shed euro

The New Zealand dollar fell to its lowest in more than three years as investors sold euro and bought US dollars, weakening other currencies against the greenback.

The kiwi touched 74.25 US cents this morning, having broken through its 2012 support levels around 74.50 cents, and reaching its lowest level since November 2011 when it touched 73.67 cents. The local currency was trading at 74.36 US cents at 8am in Wellington, from 74.50 cents at the New York close and 75.10 cents at 5pm in Wellington on Friday. The trade-weighted index declined to 76.92 from 77.24 on Friday.

The dollar index, which measures the greenback against a basket of currencies, surged to an 11-year high of 95.481, as investors favour the prospects of the reviving US economy, where interest rates are expected to rise this year, over the outlook for Europe, where the European Central Bank last week announced a 60 billion euro asset purchase programme to stimulate the regional economy and amid uncertainty about the prospects for Greece, where exit polls from the weekend election suggest the anti-euro Syriza may gain an outright majority.

"It's a broader US dollar story and a continuation of the theme that we saw on Friday night which was sell all the things against the US dollar," said Bank of New Zealand currency strategist Raiko Shareef.

The kiwi and Aussie are also weaker as investors speculate that a slump in commodity prices, low inflation and a round of interest rate cuts by other central banks signal weak global demand, which could prompt the Reserve Banks of Australia and New Zealand to reduce interest rates.

New Zealand's central bank is expected to keep its benchmark rate at 3.5 percent when it announces its decision on Thursday, although some economists expect the bank to remove its tightening bias.

The BNZ expects the central bank to retain the bias but soften its language, which could push the kiwi back up to 75.50 US cents, Shareef said.

"We are wary that RBNZ rate cut expectations have built up quickly over the past month, and are at risk of being pulled back on Thursday," he said. "This would see the New Zealand dollar rebound modestly."

In New Zealand today, the BNZ-BusinessNZ Performance of Services Index is scheduled for release at 10:30am. Markets in Australia are closed for the Australia Day public holiday and Auckland banks are also closed for the city's anniversary holiday.

Elsewhere, the Bank of Japan publishes the minutes from its last meeting and Germany releases a business confidence survey.

This week, investors will be focused on Wednesday's Federal Reserve meeting for signs that US policymakers might waver on their course to higher interest rates. US fourth quarter gross domestic product data will also be watched following a strong third quarter.

The New Zealand dollar advanced to 94.37 Australian cents from 93.57 cents on Friday as weaker commodity prices weighed more heavily on the Aussie.

The kiwi advanced to 66.57 euro cents from 66.07 cents on Friday and slipped to 49.58 British pence from 50.02 pence.

The local currency touched a two-month low of 87.27 yen and was trading at 87.45 yen at 8am from 88.89 yen on Friday.

(BusinessDesk)