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Currency Report : New Zealand Dollar Exchange Rate Drops as Earthquake Strikes

February 22, 2011 - Written by John Cameron

New Zealand’s South Island was rocked by a powerful earthquake last night which has killed at least 65 people in the City of Christchurch. The death toll is likely to rise as the rubble is cleared, with the Mayor of Christchurch, Bob Parker, estimating that a further 200 people are trapped under collapsed buildings. A state of emergency has been declared in New Zealand’s second city, as the authorities begin the massive clear-up operation.

The New Zealand Dollar has suffered badly in the foreign currency markets as a result of the disaster and is currently trading 2% down against the US Dollar at below the key 0.75 level. It has lost over 2% against the Japanese Yen and the Swiss Franc as investors holding Kiwi Dollars shift their funds into global safe havens.

The flow of funds out of New Zealand has been accentuated by a drop-off in appetite for risk across world markets. This has been caused by continuing political turmoil in the Arab states and rumours that popular uprisings may spread to key OPEC nations, Iran and Saudi Arabia.

The fall in risk sentiment has evidenced itself with severe selling pressure in world equities markets. The Hang Seng lost over 2% during yesterday’s session. Meanwhile, in Europe, the FTSE 100 is down by over 1% already today, to currently trade below the 6,000 level, having suffered losses of a similar magnitude yesterday. Futures markets point to a much lower open for New York equities when trading resumes later today, after the long weekend in the US.

Risk sentiment was further diminished by renewed fears over the Japanese economy, with ratings agency Moody’s downgrading Japanese debt from ‘Stable’ to ‘Negative’, citing concerns over the size of the Japan’s national commitments and the inaction of policy-makers in tackling the debt as the reason behind their action.

With the fundamentals of the New Zealand economy looking far from positive and the possibility of a double dip recession being discussed by analysts before the earthquake, the Kiwi Dollar is in danger of losing a significant amount of ground to the majors in coming sessions, due to the sea-change in global risk sentiment caused by events of the last 24 hours.

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