Kiwi gains as Fed official talks up easing

Tuesday 19th October 2010

The New Zealand dollar gained after Atlanta Federal Reserve President Dennis Lockhart said he might back a second round of asset purchases to help revive the sagging US recovery.

Stocks stocks on Wall Street gained amid stronger earnings from banker Citigroup, stoking investors' appetite for higher-yielding assets.

Lockhart, who has a vote on the Federal Open Market Committee, said he's "leaning in favour of additional monetary stimulus while acknowledging the longer-term risks the policy may present," and sees disinflation and deflation as a greater risk than the sluggish economy.

The Dollar Index, a measure of the greenback against a basket of currencies, dropped 0.5% as ongoing talk about more quantitative easing keeps the world's reserve currency under threat of devaluation.

Meanwhile, Citigroup beat analysts' forecasts for third-quarter earnings, helping underpin investors' appetite for so-called risk assets such as the kiwi and Australian dollars.

Lockhart's comments were "another blow to the US dollar," said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia.

"The biggest positions in the IMM (International Monetary Market) currencies are in euro and Aussie - the kiwi's not on the radar, but reacted with them" in climbing higher, he said.

The kiwi rose to 75.89 US cents from 75.40 cents yesterday, and advanced to 67.10 on the trade-weighted index of major trading partners' currencies from 66.92. It increased to 61.59 yen from 61.19 yen yesterday.

The kiwi continued its medium term slide against the Australian dollar to 76.34 Australian cents from 76.44 cents. It fell to 54.19 euro cents from 54.28 cents yesterday, and gained to 47.59 pence from 47.42 pence.

Kelleher said the currency may trade between 75.75 US cents and 76.15 cents today, and will take its cues from offshore markets.

The Reserve Bank of Australia releases the minutes from its last board meeting today, and investors will be looking for an explanation as to why the central bank didn't raise rates earlier this month.

The market was expecting another rate hike from Governor Glenn Stevens as the Australian economy continues to report strong data.

Investors are betting Stevens will hike the target cash rate 46 basis points over the coming 12 months, according to the Overnight Interest Swap curve. That would take the benchmark rate to about 5%, and keep the current 1.5 percentage point advantage Australian rates have over New Zealand.

Yesterday's local inflation data, which showed the slowest rise in the annual consumer price index for six-and-a-half years, took the pressure of Reserve Bank of New Zealand Governor Alan Bollard, who will have to contend with a spike in inflation next quarter when the impact of a hike in consumption tax comes into effect.

Businesswire.co.nz

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