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Kiwi nears eight-month high amid rumours of more Fed stimulus

Wednesday 15th September 2010

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The New Zealand dollar rose to near an eight-month high on speculation the US Federal Reserve will decide to buy more Treasuries and mortgage-backed securities at its policy meeting next week, increasing its quantitative easing measures.

The Dollar Index, a measure of the greenback against a basket of six currencies, fell 0.7% to 81.13, on talk that Fed Chairman Ben Bernanke will step up efforts to support the world's biggest economy when he reviews the benchmark interest rate next week.

Reserve Bank of New Zealand Governor Alan Bollard releases his quarterly review of monetary policy tomorrow and is expected to keep the official cash rate at 3%. Traders expect Bollard to hike rates by 72 basis points over the coming 12 months, according to the Overnight Interest Swap curve.

"There is speculation that the US Fed could kick off another round of quantitative easing, and bond yields fell on that and took the dollar with it," said Mike Jones, a strategist at Bank of New Zealand.

"We'll probably see the kiwi quiet going into the rates announcement by the Reserve Bank. The big factor is US dollar weakness, which leaves room for the kiwi to test its highs."

The kiwi climbed to 73.60 US cents from 72.81 cents yesterday, and rose to 67.50 on the trade weighted index of major trading partners' currencies from 67.14. It gained to 61.13 yen from 60.59 yesterday and up to 78.12 Australian cents from 77.96 cents. It increased to 56.55 euro cents from 56.44 cents, and was little changed at 47.28 pence from 47.25 pence.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said the currency may trade in a range of 73.25 US cents and 73.75 cents, amid speculation of more US monetary stimulus.

"Markets are getting stupid - there's talk of more quantitative easing ahead of next week's Fed meeting," Kelleher said.

"If you were trading on fundamentals, you'd be out of pocket."

Yesterday's softer July retail sales stoked concern the recovery in the New Zealand economy is still struggling to gain traction.

"The kiwi didn't perform well overnight, with the softer retail sales figures out yesterday showing that the trend for households is subdued," BNZ's Jones said.

"That tempered enthusiasm on Kiwi, and it under-performed on the crosses."

Retail sales in the US rose 0.4% in August, a touch higher than the 0.3% forecast by economists and the second straight monthly gain. Excluding autos, which dipped last month, overall sales increased by a bigger-than-expected 0.6%, the largest increase since March.

The yen advanced to a 15-year high against the dollar on news that Japan's Prime Minister Naoto Kan beat saw off a leadership challenge from rival Ichiro Ozawa in a party vote yesterday, reducing the likelihood the government will intervene to weaken the currency.

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