Dollar holds above 70 US cents amid inflation warnings

Tuesday 15th September 2009

The New Zealand dollar held above 70 US cents amid warnings about potential inflation in the world’s largest economy by the Federal Reserve’s Janet Yellen and the looming threat of a trade war between the US and China.

San Francisco Fed President Yellen told analysts in San Francisco a significant decline in the US dollar could stoke inflation and new systemic risks, according to a Reuters report.

The Dollar Index, a measure of the currency against a basket of six trading partners, fell 0.2% to 76.86. US President Barack Obama announced a special duty on imported tyres from China, which retaliated with a probe into chicken imports, sparking the prospect of a trade war between the first and fourth largest economies in the world, and spooking investors in the greenback.

“Almost everyone in the market is bearish on the US dollar, and that’s too many people in the same position – in those circumstances, it’s not going to go anywhere,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “There’s a slight downward bias on the kiwi, but it needs to break through 68 US cents” to make a substantial move lower, he said.

The kiwi climbed to 70.04 US cents from 69.78 cents yesterday, and edged up to 63.91 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 63.87.

It rose to 63.68 yen from 63.35 yen yesterday, and slipped to 47.89 euro cents from 48 cents. It declined to 81.28 Australian cents from 81.45 cents yesterday.

Kelleher said the currency may trade between 69.75 US cents and 70.25 cents today.

Central bank Governor Alan Bollard called the strength in the currency fundamentally unjustified in last week’s monetary policy statement, and Kelleher said the talk around the level of the currency could be an indicator that the Reserve Bank may be prepared to intervene in the FX market.

“If the US dollar continues to go lower, it gives the Reserve Bank the opportunity” to intervene, Kelleher said. “Anything with a seven in front of it is a risk, even if the TWI is in the mid-range.”

The last time Bollard intervened in currency markets, the TWI was above 70. The Reserve Bank of Australia will release the minutes from its last meeting, and may give an indication as to why it decided against dropping hinting at when it will tighten policy.

Germany’s Zew survey of business sentiment and retail sales in the US will be the main data drivers in the New York and London sessions.

Businesswire.co.nz

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