New Zealand Dollar Likely to Drop Below 50 U.S. Cents, AMP Says

By Tracy Withers

Jan. 27 (Bloomberg) -- New Zealand’s dollar may fall below 50 U.S. cents for the first time since 2002 as a deepening global recession drags down commodity prices, said AMP Capital Investors Ltd., the nation’s biggest non-government fund manager.

“There is still some downside risk in the context of the global slowdown,” Jason Wong, director of AMP Capital investment strategy, told reporters in Wellington. “Commodity prices are probably going to remain pretty weak.”

Prices of New Zealand’s raw materials exports fell 24 percent last year, curbing the incomes of farmers and helping push the nation into its first recession in 10 years. New Zealand’s currency slumped 31 percent versus the U.S. dollar the past 12 months, the second-worst performance among the 16 most- traded currencies against the greenback.

The currency was the fourth-best performer in 2002 through 2007. “History shows that when we go from periods of extreme overvaluation we go to extreme undervaluation,” Wong said.

The currency is likely to fall below 50 U.S. cents, he said, without making a detailed forecast. It bought 52.73 cents at 3:15 p.m. in Wellington trading.

Reserve Bank Governor Alan Bollard cut interest rates by 3.25 percentage points since July. He’ll probably cut the rate at least 1 point to 4 percent on Jan. 29, according to all 11 economists surveyed by Bloomberg News.

Bollard probably will lower the rate to 3 percent later in the year and may trim it further, Wong said.

Still, there’s a limit to how low the rate can go because New Zealand banks need to keep deposit rates high enough to attract money from local and overseas savers and investors.

Local Funding

“If they reduced rates to zero then where are banks going to get their money?” Wong said. “If I was a trading bank boss I’d be whispering to Alan that you’ve got to take that into account when you’re setting interest rates.”

New Zealand needs to maintain a higher rate than other countries to attract overseas funds, he said.

“We have to stand out to some extent so people lend to us to support our spending habits,” he said. “If you’ve got lower interest rates that just makes it more difficult.”

http://www.bloomberg.com/apps/news?p...rld_currencies