NZ dollar drops as Fed statement leaves June rate hike in prospect

Thursday 4th May 2017

The New Zealand dollar declined as the Federal Reserve gave an assessment of US economic growth that was in line with expectations, keeping open the prospect of another hike to US interest rates in June.

The kiwi fell to 68.76 US cents as at 8am in Wellington from 69.48 cents late yesterday. The trade-weighted index dropped to 74.88 from 75.37.

The Federal Open Market Committee downplayed signs of weakness in the US economy this year, saying it "views the slowing in growth during the first quarter as likely to be transitory" while inflation was running close to its target and consumption "remained solid". Investors took the statement as a sign the Fed is on track for the two rate hikes it has flagged this year, having increased the fed funds rate to a range of 0.75 percent to 1 percent in March.

"Overall, the statement leaves the impression that nothing significant has really changed and the path of gradual tightening remains in play," said Jason Wong, currency strategist at Bank of New Zealand, in a note. "The USD and US rates were slightly higher after the statement, with nothing to change the consensus view that the Fed is likely to hike again next month, subject to the data flow over the next six weeks."

BNZ estimated the chance of a June hike by the Fed has increased to 75 percent from 63 percent yesterday.

The kiwi dollar had gained yesterday after government figures showed jobs growth of 1.2 percent, a faster pace than the growth in population. Still, while there were signs of a tightening labour market, wage growth remained subdued meaning it won't drive up inflation and forced the Reserve Bank to contemplate raising the official cash rate.

"Wage inflation remained soft and gives the RBNZ some breathing space before needing to signal any likely policy tightening ahead," Wong said.

The kiwi traded at 92.58 Australian cents from 92.51 cents late yesterday. It fell to 4.7416 yuan from 4.7872 yuan and declined to 77.41 yen from 77.84 yen. It slipped to 63.16 euro cents from 63.55 cents and dropped to 53.40 British pence from 53.81 pence.

(BusinessDesk)

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