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NZ dollar falls as Fed chair Powell's upbeat economic outlook prompts US rate rethink

Wednesday 28th February 2018

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The New Zealand dollar fell after Federal Reserve chair Jerome Powell's optimistic assessment of the US economy gave investors reason to second-guess their interest rate outlooks, pushing yields on US Treasuries higher and stoking demand for the greenback. 

The kiwi dropped to 72.24 US cents as at 5pm in Wellington from 72.43 cents at 8am and 72.76 cents yesterday. The trade-weighted index declined to 74.40 from 74.61 yesterday. 

The dollar index, a measure of the greenback against a basket of currencies, increased 0.1 percent, following yields on US 10-year Treasuries higher after Powell told the House Financial Services Committee that his personal view was the economy had strengthened since December and that inflation was moving up towards the central bank's target. Powell's comments were interpreted by some investors as opening the door for more aggressive rate hikes, although he retained the outlook for increases to be gradual. 

"It wasn't a major shift, but just enough to hint that there's some big fiscal stimulus coming, they're not worried about equity markets, and away you go - yields are up a few basis points and you've got people starting to think 'is it four hikes this year rather than three?'," said Phil Borkin, senior economist at ANZ Bank New Zealand. "The New Zealand dollar was ripe for a bit of a pullback anyway - it was stretched at 74 (US cents)." 

Local data today showed annual net migration continued to slow in January, with fewer student and resident visa numbers, while the ANZ Business Outlook showed businesses are still pessimistic about the economic outlook. 

"It's not terrible by any means, but we're not setting the world on fire," Borkin said. 

New Zealand's two-year swap rate increased 2 basis points to 2.19 percent, and 10-year swaps rose 2 basis points to 3.22 percent. 

The local currency traded at 92.72 Australian cents from 92.78 cents yesterday. The local currency decreased to 51.97 British pence from 52.12 pence yesterday and was little changed at 59.08 euro cents from 59.04 cents. It fell to 77.45 yen from 77.84 yen yesterday and declined to 4.5710 Chinese yuan from 4.5889 yuan.


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