Dollar heads for 1.5% weekly slide as local and global factors erode sentiment

The New Zealand dollar is heading for a 1.5 percent weekly drop against the greenback as a Malaysian passenger jet crash in rebel-held Ukraine and an Israeli ground invasion in Gaza sapped investors' risk appetite in an environment where the local currency had already fallen out of favour.

The kiwi fell to 86.78 US cents at 5pm in Wellington from 88.10 cents on Friday in New York last week. It traded at 86.75 cents at 8am and 86.93 cents yesterday. The trade-weighted index decreased to 80.84 from 80.96 yesterday, and is heading for a 1.3 percent weekly drop from 81.91 at last week's close.

A BusinessDesk survey of 10 traders and strategists on Monday predicted the kiwi would trade between 87 US cents and 89 cents this week, testing its post-float high. Four expected the currency to fall this week, three predicted it would gain, and three had a neutral bias.

The local currency started its decline early in the week after US Federal Reserve chair Janet Yellen gave a relatively upbeat assessment of the world's biggest economy during a question and answer session. A slump in dairy prices and slower-than-expected inflation prompted some traders to question whether the Reserve Bank will continue to hike interest rates as quickly as anticipated, eroding demand for the New Zealand dollar.

The kiwi took another hit when risk-sensitive assets were sold off as investors sought relatively safe places for their funds after Ukraine said the Malaysian plane was shot down by pro-Russian rebels, and as Israel launched a ground offensive in Gaza after failing to agree terms to a peace accord with Hamas.

"From the weaker GDT (GlobalDairyTrade) auction, the slightly below consensus CPI (consumers price index) print and throw in geopolitical risk with the Ukraine events and the Gaza Strip, all that conspires to risk-off sentiment for the market," said Mark Johnson, senior dealer at OMF. "The kiwi's been a casualty of that."

OMF's Johnson said the currency will probably takes its lead from overseas markets ahead of next Thursday's Reserve Bank OCR decision, which traders still expect will deliver a quarter-point increase in the official cash rate to 3.5 percent.

The kiwi fell to 64.14 euro cents from 64.25 cents yesterday and dropped to 87.93 yen from 88.20 yen. It traded at 50.73 British pence from 50.70 pence and decreased to 92.68 Australian cents from 92.78 cents.

(BusinessDesk)