NZ dollar falls as US Fed officials say June interest rate hike still possible

Tuesday 24th May 2016

The New Zealand dollar fell as traders continued to see the possibility of US interest rates rising next month after Federal Reserve officials said the June meeting was still live for a move, stoking demand for the greenback.

The kiwi fell to 67.63 US cents at 8am in Wellington from 67.94 cents yesterday. The trade-weighted index declined to 72.84 from 73.08 yesterday.

Traders are pricing in a 32 percent chance the Federal Open Market Committee will raise the federal funds rate when it meets next month, having priced in a 5 percent chance two weeks ago. Recent speeches by central bankers have supported that line, and St Louis Fed President James Bullard and San Francisco Fed boss John Williams held to that view in speeches overnight.

"The generally modest reaction to date in equity, credit and FX markets to higher US interest rate expectations should provide the FOMC with a modicum of comfort," ANZ Bank New Zealand economist Mark Smith and FX strategist Sam Tuck said in a note. "With Fed hikes looking more imminent, the case for further rate cuts by the RBNZ and other central banks worried about local currency strength looks more tenuous in the current environment."

New Zealand's Reserve Bank has indicated it has scope to cut the official cash rate as a strong currency continues to hold down inflation, though rising expectations for a US rate hike have prompted some forecasters to push out their timeframe, with Bank of New Zealand economists now predicting no change next month.

ANZ's Smith and Tuck expect the kiwi will trade between 66.80 US cents and 68.20 cents today.

The local currency dropped to 73.85 yen from 74.65 yen yesterday as Japan's currency strengthened against the greenback after the country posted its biggest trade surplus in six years.

The kiwi was little changed at 93.61 Australian cents from 93.67 cents yesterday, and declined to 4.4294 Chinese yuan from 4.4474 yuan. It decreased to 60.29 euro cents from 60.49 cents yesterday, and dipped 46.69 British pence from 46.79 pence.

BusinessDesk.co.nz

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