Move Over Greece! Kiwi Baby Formula Threat Spurs Euro, Yen Slump

Threatening letters sent to New Zealand’s dairy producers set off a currency cascade on Tuesday, driving the euro and the yen to the weakest levels in at least seven years.

The kiwi plunged as much 1.1 percent versus the dollar after Auckland-based Fonterra Cooperative Group Ltd. called a trading halt for three companies before the police announced an investigation into a threat to poison infant formula, putting the reputation of the world’s biggest dairy exporting nation at risk.

The drop in New Zealand’s dollar -- the 10th-most traded currency worldwide -- enhanced the greenback’s haven status. That helped drive the U.S. currency through levels that set off stop-loss orders across the $5.3 trillion a day foreign-exchange markets, triggering sales of euros, yen and Aussie. Europe’s shared currency slid to $1.0785, a level unseen since 2003, while Japan’s exchange rate went through 122 per dollar for the first time since 2007.

“The U.S. dollar is in the ascendancy against just about everything, so if the New Zealand dollar is really getting hit, I suppose you’re looking around, saying, ‘Oh my god, what’s next?’” said Ray Attrill, global co-head of currency strategy at National Australia Bank Ltd. in Sydney. “You start to hit levels where people positioned the other way have their stop-loss orders, and it all gets a little bit hairy.”

Stop-loss orders trigger an automatic currency conversion when an exchange rate crosses a certain threshold.

New Zealand’s currency is vulnerable to dairy industry developments because milk powder and associated products are the biggest exports for an economy that, at $186 billion, is about 23 percent smaller than that of Greece.

Kiwi Impact

The kiwi can have such a strong impact on global markets because it is much more widely traded than the size of its economy might imply. At about $105 billion, daily trades in the the New Zealand dollar are equal to more than half local gross domestic product, the biggest ratio in the world. The currency is involved in 2 percent of all foreign-exchange transactions, according to data compiled by the Bank for International Settlements.

Letters sent to Fonterra Cooperative and Federated Farmers of New Zealand in November threatened to contaminate baby formula with the pesticide 1080, unless the government stopped using it to control wild animal numbers, the police said. Tests of more than 40,000 samples found no trace of the poison, according to the government.

The scare comes after a botulism false alarm for Fonterra in 2013, and may erode gains made after a series of food safety scandals in China boosted demand for the nation’s dairy goods.

Dairy is New Zealand’s largest foreign exchange earner, accounting for 29 percent of overseas sales in an economy where exports make up about a third of output.

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