New Zealand downgrade dents kiwi

The New Zealand dollar lost ground on Thursday after a rating agency raised fears over the country’s finances.

Fitch reiterated New Zealand’s AA+ sovereign credit rating, but downgraded its outlook from stable to negative.

The rating agency said the move reflected concern over the medium-term growth outlook for New Zealand given its persistently large current account deficit and rising foreign indebtedness.

At first the news hit the New Zealand dollar hard. It had rallied strongly this week as rising risk appetite boosted demand for the relatively high-yielding currency and Alan Bollard, governor of the Reserve Bank of New Zealand, said the country was emerging from the global recession more quickly than its peers.

David Forrester, at Barclays Capital, said Fitch’s move was a surprise to the market given the positive reaction to the country’s budget by fellow rating agencies Moody’s and S&P.

Following the Budget, Moody’s announced that its outlook on New Zealand’s Aaa sovereign credit rating remained stable, and S&P upgraded its outlook to stable from negative.

“We continue to think the New Zealand dollar will outperform other major currencies in the coming six months and will be looking to recommend re-entering long positions in the currency again in the future, especially if S&P and Moody’s do not follow Fitch’s move,” Mr Forrester said.

Late in New York, the kiwi had bounced from a low of $0.6388 and was down 0.1 per cent at $0.6480 against the dollar .

The Australian dollar reversed early losses and was up 0.3 per cent at $0.8053 against the dollar, but was down 0.2 per cent at Y75.53 against the yen.

Fitch’s move knocked investor confidence, which had improved in recent days after a strong start to the US corporate earnings season.

Adding to deteriorating sentiment was speculation that CIT, the US lender, was on the verge of bankruptcy and would not receive a bail-out from the US authorities.

Although nerves were soothed after earnings from JPMorgan, the US bank, beat expectations and US jobless claims came in better than forecast, analysts said haven demand for the yen showed that investor confidence was still fragile.

The yen rose 0.4 per cent to Y93.82 against the dollar, climbed 0.2 per cent to Y132.65 against the euro and gained 0.4 per cent to Y154.17 against the pound.

Elsewhere, the dollar remained fairly flat.

The dollar edged 0.2 per cent lower to $1.4140 against the euro, eased 0.1 per cent to $1.6437 against the pound and was steady at Fr1.0745 against the Swiss franc.