Dollar falls as Yellen deemed more upbeat, dairy prices drop

Federal Reserve chair Janet Yellen

The New Zealand dollar fell to a week-low after Federal Reserve chair Janet Yellen was deemed to be more upbeat about US economy than she was two months ago and dairy prices tumbled in the latest GlobalDairyTrade auction.

The kiwi traded at 87.69 US cents at 8:30am in Wellington, down from 88.07 US cents in late trading yesterday. The trade-weighted index slipped to 81.59 from 81.86.

The kiwi began falling after Yellen delivered her semi-annual testimony to the Senate Banking Committee. While in the testimony itself she said interest rates would have to stay low until the labour market improved, her comments in the subsequent question and answer session were a tad more upbeat, including that most participants in the Federal Open Market Committee expecting interest rates to rise in 2015. The local currency held around its lows after the results of the latest dairy auction.

"She was a bit more upbeat in the Q&A than what the prepared testimony indicated and that gave people hope," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand. The more muted reaction to the slump in dairy prices suggests "the kiwi has decoupled incorrectly from those prices and the market is trading New Zealand dollars purely on a yield basis."

New Zealand second-quarter inflation figures due this morning would help cement expectations for the next Reserve Bank hike to the official cash rate, expected on July 24, but the slide in dairy prices - 35 percent from the February peak - "will reduce the overall economic cycle" and is linked to long-term monetary policy, Tuck said.

The consumer price index rose to 0.4 percent in the second quarter for an annual pace of 1.8 percent, according to a Reuters survey. That's closer to the mid-point of the 1 percent-to-3 percent range that the Reserve Bank targets and would keep intact expectations that governor Graeme Wheeler will raise the official cash rate to 3.5 percent this month.

The kiwi traded at 64.61 euro cents from 64.64 cents late yesterday and fell to 51.13 British pence from 51.54 pence. It fell to 89.16 yen from 89.45 yen and declined to 93.55 Australian cents from 93.73 cents yesterday.

(BusinessDesk)

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