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NZ dollar weakens as investors ponder start to Federal Reserve tapering

The New Zealand dollar weakened as investors evaluate whether the Federal Reserve may start tapering its monetary stimulus next month after unexpectedly keeping the programme unchanged this month.

The kiwi slipped to 83.49 US cents at 8am in Wellington, from 83.62 cents at the New York close and 83.81 cents at the 5pm market close in Wellington on Friday. The trade-weighted index declined to 77.81 from 77.97 in Wellington on Friday.

The US dollar index, which measures the greenback against a basket of currencies, advanced after Fed officials on Friday suggested the US central bank may be close to pulling back its US$85 billion a month bond buying. A reduction in the programme supports the greenback because it would reduce the amount of US dollars in circulation, boosting its value.

"After the FOMC on-hold surprise, the market spent Friday re-evaluating the price action," Sharon Zollner, senior economist at ANZ New Zealand, said in a note. "We expect this to continue early this week as markets are reminded that tapering is only on pause and not rewind."

The New Zealand dollar will probably trade between 82.60 US cents and 83.80 cents today, Zollner said.

Most economists had expected the Fed to pull back on monetary stimulus following a meeting last week. A Reuters poll taken after the decision shows most now expect tapering to start in December.

St Louis Federal Reserve president James Bullard, who supported the decision to keep asset buying unchanged, told Bloomberg on Friday that it was a close decision in September and the Fed could scale back the programme in October should data point to a stronger economy.

Kansas City Fed President Esther George, who was the only official to vote against last week's decision, said on Friday she had been disappointed by the Fed's decision not to begin tapering.

The New Zealand dollar advanced to 89.05 Australian cents at 8am in Wellington from 88.70 cents on Friday. The local currency slipped to 82.80 yen from 83.16 yen on Friday and weakened to 61.60 euro cents from 61.90 cents as early results suggest German Chancellor Angela Merkel won the weekend's German election. The kiwi was little changed at 52.28 British pence from 52.23 pence on Friday.