Dollar falls; Fed sees low rates, current account looms

Thursday 25th June 2009

The New Zealand dollar fell after the Federal Reserve hosed down expectations it would hike interest rates later this year, and stoked support for the greenback.

The Federal Open Market Committee held interest rates in a target band of zero to 0.25% as expected, and maintained its quantitative easing programme. The Fed swatted away speculation it would hike rates later this year, saying “inflation will remain subdued for some time” with rates likely to stay “exceptionally low.”

In New Zealand, the current account deficit probably shrank to 8.4% of gross domestic product in the first three months of this year when Statistics New Zealand announces the data today, according to a Reuters survey, and could stoke demand for the kiwi if it shows the domestic economy is rebalancing.

“The FOMC statement didn’t give many surprises” after it took an early rate hike off the table, said Danica Hampton, currency strategist at Bank of New Zealand. “The kiwi got dragged along from its early highs” by the renewed support for the greenback, she said.

The kiwi slipped to 63.89 U.S. cents from 64.27 cents yesterday, and was little changed at 60.55 on the trade-weighted index, or TWI, a measure of the currency versus a basket of major trading partners, from 60.56.

It was little changed at 61.14 yen from 61.16 yen yesterday, and declined to 80.21 Australian cents from 80.27 cents. It increased to 45.85 euro cents from 45.58 cents yesterday.

Hampton said the currency may trade between 63.70 US cents and 64.80 cents today as it continues to be range-bound. Tomorrow’s GDP data should be important for the kiwi and should highlight that the New Zealand economy is faring well, relative to the rest of the world, she said.

The US economy probably shrank 1.4% in the first quarter this year, according to BNZ, and Hampton doubts the US dollar weakness will sustain itself in the immediate future.

A weak euro helped support the greenback after the International Monetary Fund forecast 13.5% contraction in the Irish economy next, a time when many countries are predicting a return to growth.

On top of that, the Swiss National Bank is believed to have devalued its currency once more, with the Swiss Franc tumbling 2% against the greenback in trading yesterday. The kiwi jumped to 0.7019 Swiss Francs from 68.47 yesterday.

Businesswire.co.nz

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