Kiwi climbs back over US73c as Fed targets inflation

Wednesday 22nd September 2010

The New Zealand dollar climbed back over 73 US cents after the Federal Open Market Committee said it may ramp up its asset purchase programme to deal with concerns about the low level of inflation in the world's biggest economy.

The Fed raised concerns about price stability, saying "underlying inflation are currently at levels somewhat below those the Committee judges most consistent," and flagged that it's willing to increase its quantitative easing (QE) programme if necessary. It held the Federal Funds Rate at between a target range of zero and 0.25%, as expected.

The Dollar Index, a measure of the greenback against a basket of six currencies, dropped 0.9% to 80.46, the lowest since April 14, as investors bailed out of their US dollar holdings, while the yield on 10-year US Treasuries fell 12.5 basis points to 2.58%.

"The Fed's looking uncomfortable with low inflation, and should it remain so, it's likely to be a trigger for more QE - effectively, it's told the market to watch inflation indicators very closely," said Imre Speizer, market strategist at Westpac.

"We're watching the 80 level on the Dollar Index very closely - a break below would be disastrous for the US dollar and very bullish for the kiwi."

The kiwi climbed to 73.37 US cents from 72.80 cents yesterday, and rose to 66.97 on the trade-weighted index of major trading partners' currencies from 66.87. It was little changed at 76.89 Australian cents from 76.87 cents yesterday, and rose to 62.44 yen from 62.16 yen. It fell to 55.41 euro cents from 55.61 cents yesterday, and edged up to 46.98 pence from 46.93 pence.

Speizer said the currency may trade between 73.20 US cents and 74 cents today, with a rogue number in the balance of payments likely to push it beyond those ranges.

The current account deficit increased to 2.8% of gross domestic product in the three months ended June 30, according to a Reuters survey. The current account gap shrank to a 21-year low 2.4% of GDP in the first quarter of the year.

European sovereign credit spreads fell across the board after Greece issued 390 million euros worth of government bonds, while Spain and Ireland raised 14 billion euros and 1.5 billion euros respectively.

Businesswire.co.nz

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