Dollar rockets on Fed Reserve's quantitative easing

By Paul McBeth

Thursday 19th March 2009

The New Zealand dollar rocketed as US government bonds slumped on the announcement that the US Federal Reserve would purchase Treasury securities and take on more mortgage and agency debt, stoking demand for high-yielding, or riskier, assets.

The Fed plans to buy up to US$300 billion in US government bonds over the next six months and will take on up to an additional US$750 billion of mortgage-backed securities and US$100 billion of agency debt, the Federal Open Market Committee said in a statement today.

The Fed left its target range for the fed funds rate at zero to 0.25%, warning interest rates would remain at "exceptionally low levels" for an "extended period". US 10-year bond rates sank almost 50 basis points to 2.5%, as the US dollar tumbled the most against the euro since September 2000.

"The numbers are huge - (the market's expectations) were nothing of the scale done this morning," said Tim Kelleher, vice president of institutional banking and markets at the Commonwealth Bank. "Quantitative easing is never good for the currency."

The kiwi jumped to 54.56 US cents, the highest since late January, from 52.89 cents immediately before the FOMC announcement, and 52.62 cents yesterday. It outperformed the Australian dollar, which rose to 67.80 US cents from 66.01 cents before the statement. The New Zealand currency climbed to 52.25 yen from 51.13 yen yesterday, and gained to 80.24 Australian cents from 79.74 cents. It dropped to 40.46 euro cents from 40.47 cents yesterday.

Kelleher said the currency may trade between 53.75 US cents and 54.75 cents today, and may push higher with rising optimism hinting the sustained downturn may be nearing an end.

New Zealand's fourth-quarter gross domestic product data comes out at the end of this month, and will give a clearer indication of domestic economy. Falling manufacturing sales for the three months to Dec. 31 suggest the economy may have contracted at a faster rate than the central bank forecast last week. The Reserve Bank predicted GDP shrank 0.8% for the period, but the weak data encouraged the Bank of New Zealand and ANZ National Bank to downgrade their forecasts to 1.1% and 1.2% from 0.6% and 0.9% respectively.

The Bank of Japan will buy 1.8 trillion yen of government bonds from banks every month, up from 1.4 trillion yen, and will extend subordinated loans to lenders as it attempts to revive its flagging economy. Japan's gross domestic product shrank at an annualised 12.1% in the three months to Dec. 31, its fastest contraction since 1974. The yen gained as the US dollar slumped, falling to 95.17 yen per dollar from 98.67 yesterday.

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