August 5, 2013 / 12:07 PM / 4 years ago

FOREX-NZ dollar falls as safety worries threaten dairy exports

* Kiwi dollar slides as bacteria found in NZ milk products

* Recovers somewhat in Europe but still seen vulnerable

* U.S. dollar stays soft after Friday's weak jobs data

* Strong UK data lifts sterling; RBA decision awaited

By Jessica Mortimer

LONDON, Aug 5 (Reuters) - The New Zealand dollar fell to a one-year low against the U.S. dollar on Monday after New Zealand's major dairy exporter, Fonterra, said it had found bacteria in some of its products that could cause botulism.

China halted the import of some dairy products from New Zealand and Australia in response.

The New Zealand dollar was down 0.9 percent at $0.7757, having tumbled as low as $0.7670 in thin Asian trade.

Dairy produce accounts for about a quarter of New Zealand's export earnings and any development that could hurt its exports typically causes the currency to fall.

"If this scandal worsens and if more countries put a ban on New Zealand's dairy imports ... then I would imagine the New Zealand dollar would weaken," said Jane Foley, senior currency strategist at Rabobank, adding it could drop towards $0.70.

However, she said the currency would recover if the crisis was managed well by the New Zealand authorities.

The kiwi would come under additional pressure if the dollar, which fell after Friday's below-forecast U.S. jobs data, resumed its recent upward trend. The next key chart support for the New Zealand currency was at the June 1, 2012 low, $0.7456.

"There was an exuberance in the market relative to the significance of the milk scandal, but other factors may drive the New Zealand dollar lower in the medium term," said Hans Redeker, head of global FX strategy at Morgan Stanley.

He said New Zealand's substantial foreign liabilities - it had a current account deficit of 4.8 percent of GDP at the end of March - made it particularly vulnerable to falls in investor appetite for risk.

DOLLAR SOFT

The U.S. dollar fell 0.5 percent to 98.42 yen, remaining under selling pressure after Friday's jobs figures cast doubt on whether the Federal Reserve would start scaling back bond purchases in September.

"If the Fed decides to postpone any tapering to later on in the year then the dollar will be on the back foot over the next few weeks into September or October," Rabobank's Foley said, adding it was most vulnerable against the yen.

Morgan Stanley's Redeker said the dollar could extend falls towards 94 yen near term, but he expected it to recover after that and remained "very upbeat" on U.S. economic prospects.

The euro dipped 0.15 percent to $1.3260, stuck below chart resistance around $1.33 and last week's peak of $1.3345.

The Australian dollar held steady at $0.8894, having earlier hit a three-year low of $0.8848 after weak retail sales data bolstered expectations Australia's central bank would cut interest rates on Tuesday.

The UK pound rose 0.35 percent to $1.5342, lifted by a very strong UK services sector survey.

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