18 Dec 2008

Dollar shoots up after US interest rate cut

6:00 am on 18 December 2008

The New Zealand dollar has traded at a one-month high - and economists say it could go higher - after Wednesday morning's unexpectedly big cut in interest rates by the United States Federal Reserve.

The dollar has been trading at about US58 cents, up more than a cent since the Federal Reserve's decision to cut its cash rate almost to zero.

BNZ economists say the Federal Reserve's move to pump unprecedented amounts of money into the US financial system could put the US dollar under renewed downward pressure.

They say the US central bank has run out of options to stimulate the economy after cutting interest rates to between zero and 0.25%.

They also say it is in effect printing money to encourage financial institutions to start lending to consumers. That could put upward pressure on the New Zealand dollar, harming exporters battling a crash in commodity prices on world markets.

The US official cash rate is at its lowest level since records began in 1954, and the central bank says it is likely to be kept at "exceptionally low levels for some time".

Economists say the greenback came under pressure after the Federal Reserve signalled it was prepared to increase the supply of US dollars as an alternative to cutting interest rates to reignite the US economy.

US stocks rallied after the decision. The Standard & Poor's 500 Index jumped 44.61 points, or 5.14%, to 913.18 - its highest closing level since 10 November.

In Asia, Japan's benchmark index was up 1.7% when the market opened, while Hong Kong's Hang Seng was almost 3% higher.

Measures to battle recession

The US central bank said it would take other steps to stimulate lending and economic activity, including large purchases of mortgage securities to help unblock credit.

The Federal Reserve is also looking at the potential benefits of buying longer-term Treasury securities in an effort to bring down other lending rates to stimulate credit and economic growth.

The bank said in a statement that since the Federal Open Market Committee's last meeting, labour market conditions had deteriorated, and data indicated that consumer spending, business investment and industrial production had declined.

It said the outlook for economic activity had weakened further.

Shortly before the meeting began, official figures showed building starts on homes in November hit the lowest level since 1959, while consumer prices fell a record 1.7% as energy prices continued to drop.

Asian economies

Japan and China have signalled they are ready to act again in a global drive to contain the worst financial crisis in 80 years.

In Japan, rates are already at 0.3% and the world's second-biggest economy could be heading for its longest slump ever.

China risks a sharp slowdown and its authorities are scrambling to secure a soft landing with massive government spending and aggressive interest rate cuts.