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NZ dollar falls to 3 1/2-month low as rising US interest rates support greenback

Tuesday 24th April 2018

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The New Zealand dollar fell to a 3 1/2-month low as rising yields on US Treasuries underpinned support for the greenback as higher US interest rates come at a time when New Zealand's are flat. 

The kiwi dropped as low as 71.44 US cents, trading at 71.45 cents as at 8am in Wellington from 72.03 cents yesterday. The trade-weighted index declined to 74.04 from 74.24 yesterday. 

The yield on US 10-year Treasuries peaked just below 3 percent, a key level for fixed income investors, and higher than the 2.94 percent yield on New Zealand's 10-year government bond. The Federal Reserve is expected to raise the federal funds rate two or three more times this year, while New Zealand's Reserve Bank is likely to keep the official cash rate at 1.75 percent well into next year. That interest rate dynamic has supported the greenback, with the Dollar Index up 0.7 percent. 

"Although it is still far too early to say, were the USD to 're-couple' with interest rate differentials, the USD has room to strengthen significantly from here," Bank of New Zealand interest rate strategist Nick Smyth said in a note. "Unwinds of speculative long positions in the NZD have also probably contributed to the NZD decline over the past week." A 'long position' is where an investor expects an asset to appreciate. 

Local data today include March visitor arrivals and migration figures, which will likely show tourism remains robust, while net migration is expected to have passed its peak. 

The kiwi rose to 93.96 Australian cents from 93.76 cents yesterday ahead of first-quarter Australian consumer price data, which is expected to show relatively muted inflation. The Reserve Bank of Australia is expected to keep the target cash rate unchanged at next week's policy review. 

The local currency fell to 58.54 euro cents from 58.78 cents yesterday after growth in European services PMI offset a contraction in the manufacturing gauge. The kiwi declined to 51.21 British pence from 51.41 pence yesterday and was unchanged at 77.68 yen. It fell to 4.5133 Chinese yuan from 4.5342 yuan yesterday. 


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