Kiwi slips as Fed's Dudley talks up US inflation, stoking greenback demand

Japan's yen was the weakest currency in overnight trading, and the kiwi traded at 80.64 yen from 80.76 yen yesterday.

The New Zealand dollar fell as investors latched on to New York Federal Reserve President William Dudley's expectations for US inflation to rise, keeping alive projections for higher US rates and stoking demand for the greenback.

The kiwi dropped to 72.24 US cents as at 8am from 72.78 cents yesterday. The trade-weighted index fell to 77.85 from 78.22.

Stocks on Wall Street broke new records, US government bond yields rose, and the US dollar index, a measure of the greenback against a basket of currencies, gained 0.4 percent after Dudley said he expects inflation to get back to 2 percent as the US labour market tightens and drives up wages. Last week the Federal Open Market Committee raised the fed funds rate to a range of 1 percent to 1.25 percent and reiterated that it saw one more hike this year while reaffirming plans to trim the size of its massively expanded balance sheet.

"The market is still sceptical that the Fed will hike rates again this year, with the probability of a rate hike before year-end currently sitting around 45 percent," Bank of New Zealand currency strategist Jason Wong said in a note. " At the local close yesterday, NZD crosses were all higher, but they have since moderated, and now look fairly flat for the day."

Japan's yen was the weakest currency in overnight trading, and the kiwi traded at 80.64 yen from 80.76 yen yesterday. The Bank of Japan's decided to keep its ultra-loose monetary policy unchanged last week, putting it out of step with other major central banks such as the Fed which are raising rates.

"If we're right in our view that US rates will track higher in the second half, then downward pressure in the yen should continue, given the BoJ's yield curve control policy which ensures widening global-Japan bond yield spreads," Wong said.

Locally, investors will be watching the ANZ Roy Morgan consumer confidence survey at 1pm NZ time and the GlobalDairyTrade auction overnight, ahead of the Reserve Bank's latest policy review on Thursday.

The kiwi fell to 95.12 Australian cents from 95.50 cents yesterday and dropped to 4.9260 Chinese yuan from 4.9570 yuan. It declined to 64.82 euro cents from 65.01 cents yesterday following French President Emmanuel Macron's parliamentary victory over the weekend and decreased to 56.74 British pence from 56.96 pence yesterday.