NZ dollar soars above 75 US cents, highest in more than 2 years, as Fed flags balance sheet trim

Thursday 27th July 2017

The New Zealand dollar rose above 75 US cents, to the highest level in more than two years, after the US Federal Reserve said it would begin reducing its bloated balance sheet "relatively soon". The greenback fell against a basket of major currencies after the Fed's announcement.

The kiwi dollar reached 75.28 US cents, the highest since May 2015, and was trading at 75.12 cents as at 8am in Wellington from 74.38 cents late yesterday. The trade-weighted index climbed to 79.10, well above the 75.8 average level the Reserve Bank forecast for the third quarter, from 78.53 yesterday.

The Federal Open Market Committee kept its target interest rate unchanged as expected at the end of its two-day meeting, saying "near-term risks to the economic outlook appear roughly balanced” though it “is monitoring inflation developments closely." But it also said it would "begin implementing its balance sheet normalisation program relatively soon" if the economy evolved as expected, having previously said it would reduce its bond holdings "this year", with the change in language seized on by the market.

"The US Federal Reserve left interest rates unchanged as expected, but it softened its language on inflation and hinted that it would begin balance sheet reduction in September," said David Croy, senior rates strategist at ANZ Bank New Zealand. "Balance sheet reduction will tighten US financial conditions, but to the extent that balance sheet reduction and low inflation delay rate hikes, it does mean that policy rates in the US will be low for longer."

Croy said along with US dollar "disenfranchisement" the kiwi dollar has benefited from "fairly respectable domestic credentials in their own right".

The kiwi traded at 93.94 Australian cents from 93.95 cents yesterday. The kiwi gained to 64.06 euro cents from 63.74 euro cents and rose to 83.54 yen from 83.03 yen. It rose to 57.31 British pence from 57.01 pence and gained to 5.0722 yuan from 5.0124 yuan.

(BusinessDesk)

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