NZ dollar gains as dovish Fed raises questions over rate hikes

Nov. 23 (BusinessDesk) - The New Zealand dollar gained as markets pared back expectations for US rate hikes next year after minutes to the Federal Reserve's last meeting raised concerns stubbornly low inflation may persist.

The kiwi advanced to 68.76 US cents as at 5pm from 68.67 cents as at 8:30am and 68.26 cents late yesterday. The trade-weighted index rose to 72.53 from 72.32.

The Fed minutes showed "many participants" observed there was some likelihood inflation might stay below 2 percent for longer than current expectations. The minutes followed comments from Fed chair Janet Yellen yesterday that she was uncertain about the outlook for inflation and led markets to pare back pricing for more hikes next year, which had already pushed the greenback lower. US figures showing durable goods orders unexpectedly dropped 1.2 percent in October added to the negative view on the greenback.

"Today was mostly about the US dollar overnight and this morning. Overnight it was hit by disappointing data and also Yellen's dovish comments and then this morning it was hit by the FOMC (Federal Open Market Committee) minutes," said Imre Speizer.

Together with the view on inflation, Speizer said the fact that meeting minutes also included a discussion about possibly changing the central bank's approach to addressing inflation was viewed as dovish as it would give the Federal Reserve greater flexibility around interest rates. The Fed minutes noted "a couple of participants discussed the possibility that potential alternative frameworks for the conduct of monetary policy could be helpful in fulfilling the Committee's statutory mandate".

Westpac's Speizer said any change would mean they "could wield a lot more discretion".

The US dollar has gone "from looking like it had turned a cyclical corner" to experiencing a "significant wobble" which is allowing the kiwi to recover, Speizer said. The New Zealand dollar was "severely punished" before and after the election and "that would seem like an overreaction to the change in government so there is probably room for the kiwi could claw some of that back," he said.

The kiwi traded at 90.29 Australian cents from 90.21 cents yesterday. It was at 58.09 euro cents from 58.16 cents and traded at 51.57 British pence from 51.50 pence. The local currency rose to 4.5328 yuan from 4.5250 yuan and fell to 76.53 yen from 76.65 yen.

New Zealand's two-year swap rate was unchanged at 2.14 percent while the 10-year swap rate eased 2 basis points to 3.08 percent.