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NZ dollar gains as Fed chair Powell seen taking cautious approach to rate hikes

Monday 27th August 2018

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The New Zealand dollar rose as Federal Reserve chair Jerome Powell indicated the central bank won't raise interest rates too aggressively for fear of stifling economic growth and as inflation there remains in check. 

The kiwi traded at 66.82 US cents as at 8am in Wellington from 66.90 cents on Friday in New York, up from 66.41 cents last week in Asia. The trade-weighted index was at 72.15 from 72.22 last week. 

The US dollar index fell 0.5 percent and stocks on Wall Street gained on Friday after Powell told the annual central bankers' forum in Jackson Hole, Wyoming there's no "clear sign" of accelerating inflation and there "does not seem to be an elevated risk of overheating". He reiterated plans to gradually raise interest rates. Investors expect the Fed to raise the federal funds rate at the September and December meetings.

The greenback was also weighed on by the People's Bank of China reintroducing a counter-cyclical factor in calculating the daily yuan fix. That was seen as another indication China's central bank is uncomfortable with a weaker yuan. 

"These comments seem to imply that the Fed intends to take the funds rate rates to somewhere in the vicinity of ‘neutral’ in the first instance, with further tightening likely to require evidence of overheating (either in the economy or financial markets) or a more meaningful rise in inflation," Bank of New Zealand interest rate strategist Nick Smyth said in a note. "The CNY strength and Powell-induced USD weakness combined to help boost the NZD, which was up 0.5 percent to close the week." 

Reserve Bank governor Adrian Orr last week told Bloomberg he's in no rush to raise interest rates and that his biggest challenge in stirring inflation. 

No local data is scheduled today. Investors will be watching Chinese industrial production data. 

The kiwi fell to 91.16 Australian cents from 91.34 cents last week as investors rallied behind the Aussie after Scott Morrison took over the prime ministership in a caucus vote. 

The local currency declined to 4.5458 Chinese yuan from 4.5512 yuan last week and traded at 74.35 yen from 74.42 yen. It was little changed at 57.46 euro cents from 57.50 cents last week and edged down to 52.04 British pence from 52.09 pence. 


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