Dollar stumbles on speculation of Fed's next move

Tuesday 27th October 2009

The New Zealand dollar fell below 75 US cents amid speculation the Federal Reserve will begin unwinding its quantitative easing programmes earlier than anticipated as the world’s largest economy shows signs of recovery.

Markets are convinced the Fed will begin tightening its policy this year and an article in the Wall Street Journal suggests the central bank may change its wording in next month’s statement. The Dollar Index, a measure of the greenback against a basket of six major currencies, climbed 1% to 76.06. Equities in the US and Europe slid amid concerns banks and lenders may have to raise more capital.

“There’s a growing feeling QE’s going to end sooner rather than later” which would encourage a strong return to the US dollar, said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “If and when the kiwi comes down, it will be a lot faster than expected.”

The kiwi fell to 74.70 US cents from 75.42 cents yesterday and dropped to 67.24 on the trade-weighted index, or TWI, from 67.51. It declined to 68.89 yen from 69.21 yen yesterday, and was little changed at 81.60 Australian cents from 81.55 cents.

It increased to 50.25 euro cents from 50.16 cents yesterday and decreased to 45.77 pence from 46.29 pence.

Kelleher said the currency may trade between 74.25 US cents and 75 cents today, with traders likely to continue taking profit at these levels with the “markets massively short on US dollars”.

The Reserve Bank of New Zealand will review the Official Cash Rate on Thursday, and speculation is growing Governor Alan Bollard will tinker with the wording of the statement to remove the easing bias. Bollard has repeatedly said interest rates will remain “at or below” current levels until the late next year.

Prime Minister John Key told Dow Jones on the sidelines of the ASEAN summit that he doesn’t expect Bollard to raise interest rates until the latter part of next year if the currency remains strong.

“As long as the exchange rate stays high, it's not likely, I would have thought, that the Reserve Bank alters interest rates,” he said.

Businesswire.co.nz

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