Dollar gains as greenback stumbles ahead of FOMC review

Wednesday 24th June 2009

The New Zealand dollar gained as the greenback weakened going into the Federal Reserve’s two-day policy meeting, which is expected to keep US interest rates near zero and may signal the end of measures aimed at combating the recession.

The Federal Open Market Committee is expected to keep a near-zero interest rate policy when it reviews monetary policy on Wednesday in the US, according to a Reuters survey.

Still, speculation is growing the Fed will raise the unwinding of its extreme policies to combat the global recession after finance ministers at a G-8 summit and European Union leaders hinted at exit strategies in separate summits this month. Optimism in Asia bloomed on the prospect China’s economy may be growing faster than expected.

“Clearly the US dollar was the driver” for the strength in the kiwi ahead of the FOMC, said Imre Speizer, currency strategist at Westpac Banking Corp. If the Fed doesn’t signal an end to quantitative easing, that would be negative for the greenback.

The kiwi jumped to 63.88 US cents from 63.14 cents yesterday, and climbed to 60.36 on the trade-weighted index, or TWI, a measure of the currency versus the greenback, yen, pound sterling, Australian dollar and euro, from 60.04.

It advanced to 60.82 yen from 60.15 yen yesterday, and was little changed at 80.45 Australian cents from 80.44 cents. It increased to 45.40 euro cents from 45.33 cents yesterday.

Speizer said the currency may trade between 63.50 US cents and 64.80 cents today as the increase in global optimism supports appetites for higher-yielding, or riskier assets. While the kiwi has ranged between 62 cents and 65 cents in the past few weeks, he expects it to fall in coming weeks.

The Dollar Index, a measure of the US dollar versus six major currencies, fell 0.9% to 79.86, as Moody’s Investor Services warned the triple-A rating for the world’s largest economy may be threatened if the greenback lost its reserve status.

Danica Hampton, currency strategist at Bank of New Zealand, said she doubts the U.S. dollar is “ready to embark on another leg lower,” and the Dollar Index will be a good guide on support for the world’s reserve currency. “We’ll need to see a break below 78.00 to persuade us the US dollar downtrend has become entrenched,” she said.

The kiwi could be further supported by an improvement in the Westpac Consumer Confidence survey released today, with economists predicting optimists will outnumber pessimists.

The euro was bolstered by comments from European Central Bank council member Axel Weber who said at an event in Munich there was no need to expand stimulus measures. The euro gained to US$1.4073 from US$1.3925 yesterday.

Businesswire.co.nz

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