NZ dollar drops as Fed holds steady
The New Zealand dollar dropped this morning, but nowhere near as dramatically as expected, following a statement from the US Federal Reserve.
The markets were poised to move – in any direction – depending on whether board chairman Ben Bernanke signalled a further round “quantitative easing” (aka printing money) or any change to his previous stance of keeping interest rates “exceptionally low” until 2014.
In the event, the Fed announced no new action this morning, and offered few hints over whether it would prime the pump in future, and few clues on rates.
Fed officials acknowledged improvements in the labor market, but cautioned that economic risks remain, including inflationary risk from rising oil and gas prices.
Any further quantitative easing would have seen renewed appetite for currencies such as Australia and New Zealand and would have pushed both those currencies higher.
The high New Zealand dollar is undermining economic growth and hurting exporters, Reserve Bank governor Alan Bollard said last week. At the time, the New Zealand currency moved downwards but returned to previous levels within half a day and has since moved higher.
Any shift by the US Federal Reserve’s open market committee would have seen the currency shift more dramatically this morning.
“The market is primed for an explosive move in either direction,” said DailyFX currency analyst Christopher Vecchio in the lead up to the meeting, held in Washington this morning (NZ time).
In the event, there was a drop in the cross-rate between the New Zealand and US currencies, but no explosion.
With the Federal Reserve’s statement signalling “moderate” US GDP growth and no change to the outlook for interest rates, along with no further quantitative easing, the NZ/US cross rate dropped from US82.21c to US82.00c in the 20 minutes after the announcement.