Volatile NZ dollar expected to 'remain messy'

Volatility in currencies is expected during the week ahead as the New Zealand dollar wanes against the United States dollar, but it held about A82c against the Australian yesterday as investors went to safe-haven currencies such as the Japanese yen and greenback.

After the news late on Monday of bankruptcy filing by the 158-year-old Lehman Brothers investment bank, the fourth-largest in the US, the New Zealand dollar initially gained ground against the weakening US dollar to US67.15c, but by 8am yesterday had slipped back to US66.07c.

It reached a low of US65c before noon yesterday before retracing some losses but finished down US1.91c at US65c at 5pm.

BNZ chief economist Craig Ebert said the gathering strength of the greenback during August but subsequent fall was "testimony to the troubled global scene and credit markets".

"It is still hugely volatile with events in the US; Lehmans, Merrill Lynch and now American Insurance Group [AIG] have inflamed the situation," he said.

Merrill Lynch had to accept a takeover by Bank of America Corp while major insurer AIG needs funding up to $US75 million.

"Just as things get back on their feet there's another revelation. This is far from over," Mr Ebert said.

Similarly, Westpac senior economist Doug Steel expected the volatile kiwi to "remain messy" for the rest of the week, although some New Zealand economic data out at the end of the week might have a small impact.

"It's not about economics but market confidence, in the US," Mr Steel said.

ABN Amro Craigs broker Peter McIntyre said the Reserve Bank of New Zealand was expected to join the Reserve Bank of Australia in "aggressive" interest cuts, and New Zealand would be the first developed country to go into formal recession later this month.

Although there were major market concerns in the US, positive growth was still forecast there, and therefore, the greenback was becoming an investor safe haven.

"The kiwi will remain vulnerable to the USD if the equity markets continue to slide," Mr McIntyre said.

About a week ago, the kiwi was trading at 74 against the yen, but yesterday had fallen to about 69.5.

Mr Ebert said: "When the Japanese investors get nervous about their own economy, they tend to retreat from overseas [currencies], which bolsters their own."

He said at present, the turmoil was confined to market problems as opposed to economics, but with the European, United Kingdom and Australian economies slowing, "economics would be dragged into it".

"Global growth now looks sub-par. Instead of average it's now soft, with the possibility of a global recession next year," he said.

Oil continued its decline yesterday with West Texas down 5%, according to ABN Amro Craigs broker Peter McIntyre.

Yesterday, Brent North Sea oil futures were at $US97.21, West Texas International at $US95.49, and Dubai oil for next month was trading at $US94.34, according to Reuters.

Mr McIntyre said weakening global demand for oil remained, as poor economic data came out of Europe and the US.

Plus, Hurricane Ike had not been as disruptive to US supply as had been forecast.

"We see oil headed straight back to $US85 [per barrel]," Mr McIntyre said.

ABN research earlier in the month had given a long-range three-year forecast for oil to head towards $US56, having hit $US100 in early January for the first time and a record $US147.27 in mid July, before its present decline began.

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