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Dollar jumps above 87 US cents after Fed lowers growth outlook

The New Zealand dollar jumped above 87 US cents after the Federal Reserve lowered its US growth and long-term interest rate projections, damping demand for the greenback.

The kiwi spiked from 86.77 US cents immediately before the Federal Open Market Committee's statement at 6am New Zealand time to trade at 87.23 cents at 8am, from 86.58 cents at 5pm yesterday. The trade-weighted index surged to a record 81.27 from 80.82 yesterday.

The FOMC, following its regular two-day meeting, cut its forecast for US economic growth in 2014 to between 2.1 percent and 2.3 percent, from an earlier forecast of around 2.8 percent to 3 percent, and lowered its projections for long-term interest rates by about 25 basis points. Offsetting the lower long-term rates, the Fed increased its short-term rate hike expectations for 2015 and 2016 and reduced its monthly bond-buying programme.

"The FOMC was a slight negative for US interest rates and therefore the US dollar and therefore higher for kiwi/US," said Imre Speizer, Westpac Banking Corp senior market strategist in New Zealand. "US interest rates fell because the interest rate projections were changed. Lower long-run growth is translating into lower long-run interest rates and therefore a lower US dollar."

Later this morning, data is released on first quarter GDP with economists polled by Reuters expecting a gain of 1.2 percent from the previous quarter for an annual average rate of 3.1 percent.

The kiwi will probably remain elevated today, said Speizer.

The New Zealand dollar jumped to 51.33 British pence from 51.05 pence yesterday. The pound weakened after the release of the Bank of England minutes from its meeting this month, which showed officials wanted to see more evidence of economic slack being absorbed before raising rates.

The UK publishes retail sales for May tonight.

The kiwi jumped to 88.89 yen from 88.55 yen yesterday, gained to 92.82 Australian cents from 92.74 cents and increased to 64.19 euro cents from 63.92 cents.

(BusinessDesk)

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