Dollar slips after higher US inflation turns focus to tighter US monetary policy

The New Zealand dollar slipped after a report showing US inflation accelerated more than expected prompted investors to mull the outlook for tighter monetary policy in the world's biggest economy.

The kiwi edged lower to 86.48 US cents at 8am in Wellington from 86.56 cents at 5pm yesterday. The trade-weighted index was a touch higher at 80.74 from 80.70 yesterday.

The US dollar index, which measures the greenback against a basket of currencies, rose after a report showed US inflation accelerated at a faster pace, raising the prospect of higher US interest rates. The data was released ahead of the Federal Reserve's meeting with Chair Janet Yellen scheduled to announce the Fed's monetary policy intentions at 6am tomorrow.

"The New Zealand dollar slid along with other major currencies against the US dollar overnight," Raiko Shareef, currency strategist at the Bank of New Zealand, said in a note. "The US dollar was ascendant last night, as signs of burgeoning inflationary pressure put investors on guard for the Fed's policy meeting tonight."

A Bloomberg News poll released overnight showed more than half of 56 economists thought futures prices were underestimating the likely pace of US monetary policy tightening over the next two years. Traders are currently pricing the Fed Funds Rate at 0.77 percent by the end of 2015, lagging the Fed's own projections from March suggesting 1 percent by the same point, said the BNZ's Shareef.

"Given the upward surprise in inflation data since then, it seems likely the Fed's projections will be upgraded at tonight's meeting," Shareef said.

Today, the New Zealand dollar will probably trade within its recent range of 86.30 US cents to 87 cents, he said.

Overnight, dairy prices rose on lower volumes at Fonterra Cooperative Group's GlobalDairyTrade auction, following declines in the past eight auctions.

Later this morning, a report is expected to show New Zealand's current account deficit continued to shrink.

The kiwi touched 92.74 Australian cents overnight, its highest in more than three weeks, after minutes from the latest Reserve Bank of Australia meeting published yesterday were more pessimistic than expected. The local currency was trading at 92.65 Australian cents at 8am from 92.49 cents yesterday.

The New Zealand dollar was little changed at 63.87 euro cents from 63.84 cents yesterday, and unchanged at 51 British pence ahead of the release of the Bank of England's minutes from its last meeting tonight. It edged higher to 88.34 yen from 88.26 yen yesterday.

(BusinessDesk)

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NZ Market Snapshot

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Sym Price Change
USD 0.7959 -0.0001 -0.01%
AUD 0.9075 0.0004 0.04%
EUR 0.6264 0.0040 0.64%
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NI225 15038.2 15129.1 14804.3 1.59%