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NZ dollar soars to 4-month high as Fed holds fire on tapering, local economy grows

Thursday 19th September 2013

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The New Zealand dollar rose to a new four-month high as the Federal Reserve surprised markets by maintaining its bond buying programme and after local economic growth beat expectations on the strength of construction-related services.

The kiwi climbed as high as 84.12 US cents, trading at 83.92 cents at 5pm in Wellington from 83.64 cents at 8am and 82.25 cents yesterday. The trade-weighted index jumped to 77.86 from 77.01 yesterday.

High-yielding assets such as the kiwi were the prime beneficiary after Fed chairman Ben Bernanke said the US central bank wasn't going to start unwinding its US$85 billion monthly asset purchases until the world's biggest economy showed more signs of life. Investors were betting on the Fed slowing the pace of money printing by at least US$10 billion a month, which would have supported the greenback.

"The Fed not announcing any tapering caught the market wrong-footed," said Michael Johnston, senior trader at HiFX in Auckland. "Can the kiwi go higher? Yes it can."

HiFX's Johnston said the currency may find support at 83.30 US cents, and could climb as high as 85 cents until the US economy shows signs of life.

New Zealand government figures showing a stronger local economic recovery added to the kiwi's gains, as gross domestic product grew 0.2 percent in the second quarter, beating the 0.1 percent estimated in a Reuters survey. Continued growth in business services, primarily architecture and engineering, drove the gains, and offset contraction in the primary sector caused by the summer drought. Historic revisions also meant the annual pace was 2.7 percent, ahead of the 2.4 percent pace predicted.

HiFX's Johnston said the Fed's delay to tapering and the stronger economic data will make it harder for the Reserve Bank, which signalled interest rates are set to rise next year. Governor Graeme Wheeler has been reluctant to hike rates in the face of a housing bubble in Auckland and Christchurch for fear of making the kiwi dollar more attractive.

"If they start raising rates or talking about raising rates, that would create further upward pressure on the kiwi," Johnston said.

The local currency climbed to 88.42 Australian cents at 5pm in Wellington from 87.93 cents yesterday, and gained to 82.54 yen from 81.58 yen. It advanced to 62.03 euro cents from 61.57 cents, and gained to 52.03 British pence from 51.70 pence.

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