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NZ dollar little changed, may decline in 2014 as Fed starts tapering

The New Zealand dollar was little changed in patchy trading leading in to the New Year holiday period and is likely to weaken next year as the Federal Reserve pulls back on its bond buying programme which has dented the greenback.

The local currency edged up to 82.14 US cents at 4:30pm in Wellington, from 82.06 cents at 8am this morning and is a touch weaker over the course of 2013, down 0.7 percent.

The Fed earlier this month said it would start tapering its US$85 billion a month bond-buying programme from January as the world's largest economy improves. A reduction in the programme supports the greenback because it reduces the amount of US dollars in circulation, boosting its value.

"The US dollar certainly looks like it can make a more sustained move," said Michael Johnston, senior trader at HiFX. "We are going to see the US economy continue to improve and we are going to see continued consistent tapering of the bond purchases. The kiwi against the US will head lower, we can see it down sub-80 cents in the first quarter of 2014."

Trading was patchy today with low liquidity ahead of New Year public holidays over the next two days, Johnston said.

US dollar strength will probably override the benefits of an expected increase in New Zealand interest rates next year, Johnston said.

In an otherwise quiet week for currency markets, investors will be eyeing a speech by Fed Chairman Ben Bernanke, who is set to discuss the changing Fed in Philadelphia on Friday. Philadelphia Fed Bank President Charles Plosser and Fed Governor Jeremy Stein are also scheduled to speak in Philadelphia on Friday, while Richmond Fed Bank President Jeffrey Lacker will talk about the economic outlook in Baltimore.

Meanwhile, on Thursday investors may be anticipating a weaker report on US manufacturing after a stronger than expected reading last month. The Institute for Supply Management's manufacturing index unexpectedly rose in November to 57.3, the highest since April 2011.

The kiwi was little changed at 92.01 Australian cents at 4:30pm from 92 cents this morning, having surged 16 percent this year.

Divergent interest rate paths in the two nations could push the kiwi higher against the Aussie next year with the potential for Australia's benchmark rate to drop below New Zealand's, said HiFX's Johnston, adding the kiwi could nudge above 96 Australian cents.

The New Zealand dollar, which touched an eight-month high of 86.37 yen early this morning, was recently trading at 86.15 yen from 86.23 yen this morning.

The kiwi has gained 20 percent against the yen this year as New Zealand heads into a period of higher interest rates while Japan eyes further stimulus to pull the nation out of deflation. The kiwi will probably struggle to make the same headway in 2014 after such a big run but will probably stay firm with the potential to nudge higher, said HiFX's Johnston.

The local currency was little changed at 59.55 euro cents from 59.45 cents this morning, and is down 5 percent this year. The kiwi edged up to 49.83 British pence from 49.69 pence this morning and is about 2 percent weaker this year. Sterling is likely to strengthen next year on signs of improvement in the UK economy, Johnston said.

The trade-weighted index is little changed at 77.52 from 77.45 this morning, having advanced about 4 percent this year.

(BusinessDesk)

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