NZ dollar tumbles as Fed raises rates, projects faster pace of increases

Thursday 15th December 2016

The New Zealand dollar fell after the Federal Reserve raised its benchmark interest rate and signalled a faster pace of hikes in 2017 to allow for a bigger-spending Trump administration.

The kiwi dollar dropped to 71.46 US cents as at 8am in Wellington from 72.15 cents late yesterday. The trade-weighted index fell to 78.76 from 79.18.

The Fed raised the target federal funds rate by 25 basis points to between 0.50 percent and 0.75 percent, as expected, but also signalled three further increases in 2017, more than the two the market was expecting, with more increases slated for 2018 and 2019 at the same pace to bring the benchmark rate up to 3 percent. The Fed's statement said policymakers were unanimous on the hikes.

"The key point in the above is the Fed seeing three rate hikes in 2017 – they previously only saw two," traders at HiFX said in a note. "The NZD-USD is lower in immediate response as the USD strengthened across the board."

Fed chair Janet Yellen is getting underway with her media conference, which is likely to trigger further currency market reaction as she elaborates on the Fed's views. The central bank has to weigh the likely stimulus coming from a Donald Trump presidency and the effect that will have on the labour market and inflation.

The kiwi fell to 4.9380 yuan from 4.9797 yuan late yesterday. It slipped to 67.61 euro cents from 67.80 cents and fell to 95.91 Australian cents from 96.24 cents. The local dollar declined to 56.67 British pence from 56.98 pence and gained to 83.15 yen from 83.05 yen.

BusinessDesk.co.nz

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