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NZ dollar falls amid growing speculation for US rate hike

Friday 5th March 2010

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The New Zealand dollar fell amid growing speculation the Federal Reserve will begin to tighten monetary policy earlier than anticipated, stoking the appeal of the greenback.  

The Dollar Index, a measure of the greenback against a basket of six currencies, climbed 0.6% to 80.64. Among moves being interpreted as pointing to higher Fed rates, US mortgage finance companies Fannie Mae and Freddie Mac cut credit lines to 20 European banks. Still, St Louis Fed President James Bullard reiterated interest rates will remain low for an extended period of time in a speech he gave in Minnesota.  

“There’s been more of a macro (economic) shift than anything else, with investors buying the (US) dollar and selling (other) currencies,” such as the kiwi, said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “There reports that the Fed is talking about the need to be less accommodative, and people are still pricing in higher US interest rates.”  

The kiwi dropped to 68.52 US cents from 68.97 cents yesterday, and declined to 63.54 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 63.70. It sank to 76.19 Australian cents from 76.55 cents yesterday, and fell to 45.63 pence from 45.78 pence. It edged up to 50.52 euro cents from 50.46 cents yesterday, and rose to 61.21 yen from 60.96 yen.  

Kelleher said the currency may trade between 68.30 U.S. cents and 68.75 cents today, and continues to look heavy as investors eschew it in favour of the Australian dollar.  

The divergence between the trans-Tasman economies as the Reserve Bank of Australia continues to move towards normal monetary policy settings has become more apparent after the kiwi tumbled to a nine-year low against the Australian dollar, with the prospect of rate hikes in New Zealand off the table until the middle of the year.  

Reserve Bank of New Zealand Governor Alan Bollard will review the official cash rate next Thursday, and is expected to keep rates on hold, reiterating his desired timeline for a mid-year hike.  

Higher yielding currencies were soft in the Northern Hemisphere sessions even though Greece drew strong demand for a 5 billion euro 10-year bond, which was priced at a spread of 300 basis points over the mid-swap rate – a premium that’s about twice the yield on German bunds. The euro dropped to US$1.3676 from US$1.3665.

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