Dollar drops after Fed signals US economic recovery ahead, driving greenback demand

The New Zealand dollar dropped almost three-quarters of a US cent after the Federal Reserve raised its projections for future US interest rates, signalling it sees recovery ahead for the world's largest economy and spurring demand for the greenback.

The kiwi dropped to 85.51 US cents at 8am, from 86.21 cents immediately before the Fed's 7am statement, and down from 86.10 cents at 5pm yesterday. The trade-weighted index fell to 80.07 from 80.22 yesterday.

The Fed, in its first meeting under new chair Janet Yellen, raised its projections for the future path of the Fed funds rate by 25 basis points to 1 percent by the end of 2015 and by 50 basis points to 2.25 percent by the end of 2016. It previously expected the rate to be 0.75 percent by the end of 2015 and 1.75 percent the following year. The move toward a more restrictive interest rate path ahead has turned investor attention to the attractiveness of US assets, and boosted demand for the US dollar.

"The increase in the expected path of rates, even though it's a long way out, is above where the market was, and it's encouraged the market to be betting on a US recovery," said ANZ Bank senior FX strategist Sam Tuck. "By increasing those forecast projections, implicitly the Fed is forecasting the US economy to recover and rates to normalise faster than they were in December, which has driven the US dollar stronger."

Still, Yellen stressed the Fed's future track remained dependent on improving economic data, Tuck said.

Following its two-day meeting, the Fed pulled back its economic stimulus programme by US$10 billion, as expected. The Fed will buy US$55 billion of bonds in April, down from US$65 billion in March and US$85 billion in December.

Later today, the focus will turn to Philadelphia Fed Business Outlook Survey and US existing home sales.

In New Zealand today, traders are awaiting fourth quarter data for gross domestic product, scheduled for release at 10:45am. GDP probably rose 0.9 percent in the final three months of 2013, based on a Reuters survey of 11 economists.

The New Zealand dollar edged up to 94.47 Australian cents at 8am from 94.40 cents at 5pm yesterday.

The kiwi advanced to 87.61 yen from 87.21 yen yesterday, slipped to 51.70 British pence from 51.87 pence and was unchanged at 61.81 euro cents.

The New Zealand dollar fell to 5.2954 yuan from 5.3324 yuan yesterday in the first day of direct trading between the currencies.

(BusinessDesk)

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NI225 15093.8 15232.5 15195.8 -0.37%