Dollar edges lower as RBA looks to 'gradual' rate hikes

Wednesday 18th November 2009

The New Zealand dollar edged lower with Australia’s currency, declined on the back of the country’s central bank reaffirming it will gradually hike interest rates, while weaker than expected production data in the US spurred investors to eschew higher-yielding, or riskier, assets.

The Reserve Bank of Australia’s November minutes showed the central bank expects a “gradual” tightening of monetary policy, and warned that the pace of its rate hikes is still “an open question.”

This damped sentiment for the Australian dollar, which declined 0.2% to 92.86 US cents, as investors pushed out their forecasts for interest rate rises. US industrial production rose 0.1%, lagging behind the expected 0.4%, and eroded optimism about the recovery in the world’s largest economy.

The RBA minutes was “more dovish than expected, given the market is pretty bearish on rates,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. The kiwi “should follow the Aussie weaker against the U.S. dollar, and drift off slightly,” he said, referring to the Australian dollar colloquially.

The kiwi slipped to 74.37 US cents from 74.67 cents yesterday, and declined to 66.29 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 66.37. It sank to 65.35 yen from 66.33 yen yesterday, and decreased to 80.04 Australian cents from 80.25 cents. It was little changed at 50.05 euro cents from 49.95 cents yesterday, and edged lower to 44.26 pence from 44.30 pence.

Kelleher said the currency may trade between 74.20 US cents and 74.60 cents today as investors trim their short US dollar positions after Federal Reserve chairman Ben Bernanke said the central bank was watching the currency. This sentiment was backed up by San Francisco President Janet Yellen who said the Fed is also monitoring asset markets.

Still, the Fed signalled it may be beginning to withdraw its stimulus measures, reducing the maximum maturity on discount window loans to 28 days from 90 days, Kelleher said.

The discount window allows financial institutions to borrow money from the central bank, usually on a short-term basis. Bernanke boosted this to 90 days after the collapse Bear Stearns Cos. in 2008 in one of his first acts to shore up the financial stability of the US.

US President Barack Obama met his Chinese counterpart Hu Jintao in Beijing yesterday, and said a revaluation of the yuan was “an essential contribution to the global rebalancing effort.”

American officials have complained the undervalued Chinese currency has unfairly left importers to bear the brunt of the global recession. The kiwi dollar declined to 5.09 yuan from 5.11 yuan yesterday.

Businesswire.co.nz

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