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NZ dollar declines as Fed pledges to keep US interest rates low

Wednesday 4th April 2012

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The New Zealand dollar tumbled after the Federal Reserve ruled out any additional monetary stimulus, removing a threat to the US dollar, which rallied against most major currencies.

The New Zealand dollar traded fell as low as 81.65 US cents after the release of minutes from the Fed’s March 13 meeting, from 82.34 US cents immediately before the announcement. The kiwi traded at 81.82 cents at 8am.

Investors’ hopes were diminished that the Fed might add possible monetary stimulus to the world’s largest economy, as its members kept their outlook for 2013 to 2014 largely unchanged.

The Fed, which has kept its benchmark interest rate near zero, ruled out any further stimulus unless US economic expansion falters or consumer prices rise at a rate slower than its 2 percent target.

“If the US data continues to get better we will eventually see the kiwi dollar improve against the US,” said Stuart Ive, currency strategist at HiFX.

“I think we are entrenched in this 80.50 to 82.60 range at the moment - I don’t see us moving out of that range.” “The Fed has clearly stated they won’t raise interest rates till the end of 2013 – maybe markets are starting to believe them,” Ive said.

The Reserve Bank of New Zealand is seen as lifting interest rates by 24 basis points in the next 12 month, according to the Overnight Index Swap curve. The central bank held New Zealand’s record low official cash rate of 2.5 percent at its March meeting.

“In New Zealand I think the Reserve Bank will be firmly on the fence and watching world events,” Ive said.

Australia, New Zealand’s biggest export market, left its target cash rate unchanged at 4.25 percent yesterday. Governor Glenn Stevens said the board is waiting on inflating data before assessing whether to ease monetary policy.

The New Zealand dollar rose immediately after the announcement. It traded at 79.21 Australian cents just after 8am, up from 79.11 cents at 5pm yesterday.

“The initial RBA announcement added a level of excitement but the US dollar rushed back into favour this morning,” Ive said.

Prices of dairy products snapped a three-month slide in Fonterra Cooperative Group’s latest GlobalDairyTrade auction this morning, rising 1.5 percent.

Rennet, casein and cheddar were the biggest gainers while whole and skim milk powder fell. The sale is the first since Fonterra last week posted an 18 percent gain in first-half profit on increased sales and higher prices from its ingredients business.

The ANZ National Bank Commodity Price Index is set for release this afternoon.

The New Zealand dollar rose to 61.87 euro cents from 61.70 cents yesterday. It gained to 51.54 British pence from 51.31 pence and increased to 67.82 yen from 67.44 yen. The trade weighted index advanced to 73.19 to 73.1.

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