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NZ dollar weakens as signs of improvement in US economy signals pull back in stimulus

Friday 2nd August 2013

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The New Zealand dollar weakened as signs of improvement in the US economy point to the Federal Reserve reducing its monetary stimulus, bolstering the greenback.

The kiwi slipped to 78.74 US cents at 8am in Wellington, from 79.65 at 5pm yesterday. The trade-weighted index fell to 75 from 75.54.

The US dollar index, which measures the greenback against a basket of currencies, rose to its highest in more than a week after US reports showed manufacturing expanded in July at the fastest pace in more than two years and first-time claims for unemployment insurance fell to the lowest in five years. Traders will be looking to a US jobs report tonight for further signs of strength which may prompt the Fed to start tapering its US$85 billion a month bond-buying programme which has debased the greenback.

"The NZD/USD has felt the pinch of broad strengthening in the USD overnight," Mike Jones, a currency strategist at the Bank of New Zealand, said in a note. "The greenback has been the star performer as a string of strong US data restored faith in Fed tapering."

A report to be published in Washington today is expected to show the US unemployment rate ticked down in July, to 7.5 percent from 7.6 percent in June, whilst the country added 185,000 non-farm jobs, according to Reuters polls.

"The risks here appear tilted towards a strong result," said BNZ's Jones. "If this proves to be the case, the headwinds from additional USD strength would likely press the NZD/USD back down into the 76.90-78.90 cent range."

Overnight, the European Central Bank kept its benchmark interest rate unchanged and reiterated interest rates will stay low for the foreseeable future. The Bank of England also kept its benchmark rate at a record low and left its bond-buying programme on hold.

The local currency fell to 59.60 euro cents at 8am in Wellington, from 59.98 yesterday and slipped to 52.08 British pence from 52.52 pence. The kiwi was little changed at 78.32 yen and weakened to 88.24 Australian cents from 88.85 yesterday.

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