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Kiwi gains as FOMC minutes keep asset purchases on the cards

Wednesday 13th October 2010

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The New Zealand dollar gained as the minutes from the last Federal Open Market Committee meeting stoked speculation the central bank will embark on a second round of asset purchases when it meets next month.

The Fed said "members generally thought that the statement should note that the committee was prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate," though some of the bankers wanted the economy to decline before acting.

That eroded support for the greenback as investors prepare for another bout of quantitative easing from the Fed, and has traders looking for yield in the trans-Tasman currencies. The Dollar Index, a measure of the greenback against a basket of six currencies, fell 0.4% to 77.38.

The minutes gave "no more detail on QEII, but the market is pricing it in and a reasonable amount of it," said Alex Sinton, senior dealer at ANZ New Zealand.

"There should be buyers for the kiwi as the US trend of weakness continues."

The kiwi advanced to 75.45 US cents from 74.89 cents yesterday, and rose to 67.04 on the trade-weighted index of major trading partners' currencies from 66.79. It gained to 61.77 yen from 61.34 yen yesterday, and increased to 76.55 Australian cents from 76.45 cents. It was up to 54.23 euro cents from 54.17 cents yesterday, and climbed to 47.80 pence from 47.15 pence.

Sinton said the currency may trade between 75.05 US cents from 75.85 cents today, with US flows leading investor sentiment in the absence of any major local data.

"The kiwi has an upside bias while the US dollar is on the downside, but it will need the euro to push up to US$1.40 to help us move along," he said. The euro rose 0.6% to US$1.3911.

AMP Capital Investors chief economist Shane Oliver told a media briefing in Wellington yesterday the kiwi dollar will likely its Australian counterpart to parity with the greenback as the global economy rebalances to favour countries that produce raw materials, such as Australia, New Zealand and Canada. After two decades of underperformance, there's a "serious prospect" of it outperforming in the coming years, he said.

That comes as Prime Minister John Key waded into the so-called "currency wars" in his post-Cabinet press conference on Monday, saying the strength of the kiwi was becoming a concern for some exporters.

European Central Bank President Jean Claude Trichet called for calm from nations over their currencies after Japanese authorities refused to rule out further intervention, while Thailand's government agreed to impose a 15% withholding tax on capital gains and interest income from offshore investment.

ECB council member Axel Weber said the region's central bank is more worried about inflation risks than growth, and suggested interest rate hikes might come earlier than expected.

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