Dollar gains as weak US inflation saps demand for greenback

Thursday 18th June 2009

The New Zealand dollar gained as weaker-than-expected inflation in the US dashed expectations of an early rate hike by the Federal Reserve and sapped demand for the greenback.

The US consumer price index dropped an annual 1.3% in May, greater than the expected 0.9% decline, and the likelihood of the Fed raising its benchmark interest rate this year dropped to 46% from the 64% predicted last week, according to interest rate futures tracked by Bloomberg.

The weakness in the US dollar stoked demand for the kiwi as investors ignored Reserve Bank Governor Alan Bollard’s jawboning yesterday and sought higher yields. Bollard told a business audience that markets may be disappointed if they are buying the New Zealand dollar on the “expectation of a strong recovery.”

The weaker CPI numbers “convinced investors the Fed was unlikely to start raising interest rates any time soon and this prompted a broad based sell-off in the US dollar,” said Danica Hampton, currency strategist at Bank of New Zealand. “It seems the RBNZ wants to remind everyone of the still present downside risks – a judicious dampener for both New Zealand rates and the NZ dollar.”

The kiwi climbed to 63.35 US cents from 62.88 cents yesterday, and advanced to 60.06 on the trade-weighted index, or TWI, a measure of the currency versus its major trading partners, from 59.81. It was little changed at 60.56 yen from 60.54 yen yesterday, and increased to 79.78 Australian cents from 79.35 cents. It gained to 45.40 euro cents from 45.30 cents yesterday.

Imre Speizer, currency strategist at Westepac Banking Corp. said the currency may trade between 62.40 US cents and 64 cents today, the same range it’s drifted around for the past three days. The kiwi had a “perfect correlation” with the greenback yesterday gaining 0.6% as the US dollar slipped 0.6%, but the trend for the New Zealand dollar is still lower, he said.

The underlying message in Bollard’s speech was that there’s little he can do to control the currency and interest rates, and he’s “going along for the ride,” said Speizer. Bollard’s warning about the risks to New Zealand’s economy were taken as a negative by interest rate markets with a four basis points gain across the swap curve, Speizer said.

Businesswire.co.nz

Comments from our readers

No comments yet