Dollar extends decline after Fed continues tapering, ahead of RBNZ interest rate decision

The New Zealand dollar extended its decline after the Federal Reserve announced plans to continue to wind back its monetary stimulus despite volatility in emerging markets. The decision comes just one hour before New Zealand's central bank reviews interest rates.

The kiwi slipped to 82.38 US cents at 8:20am from 82.75 cents immediately before the 8am announcement and 82.81 cents at 5pm yesterday. The trade-weighted index slipped to 77.95 from 78.38 yesterday.

The Fed said it would reduce its monthly bond purchase programme next month by a further US$10 billion to US$65 billion as expected, after trimming the programme by the same amount this month. The withdrawal of stimulus has contributed to turmoil in emerging markets as investors pull their funds out. The announcement comes ahead of a decision by New Zealand's Reserve Bank on interest rates at 9am, with most economists expecting no change.

"This morning, event risk for the NZD is very high, with the US Fed and RBNZ announcing rates in rapid succession," Kymberly Martin, markets strategist at Bank of New Zealand, said in a note ahead of the release. "An 'on hold' decision from the RBNZ, as we expect, could see a dip in the NZD/USD given the market still prices around a 35 percent chance of a hike today. The greater knee-jerk response would come from an unexpected hike. This would likely see an initial spike higher in the NZD."

Later today, traders will be eyeing reports on Chinese manufacturing and US fourth quarter growth. New Zealand releases data on building consents and migration for December at 10:45am.

The New Zealand dollar fell to 83.98 yen at 8:20am from 85.46 yen at 5pm yesterday as investors favoured safe haven currencies on concern about the impact of the Fed's tapering on emerging markets.

The kiwi advanced to 94.21 Australian cents from 94.06 cents yesterday and weakened to 60.32 euro cents from 60.65 cents.

The local currency dropped to 49.73 British pence from 49.95 pence yesterday after Bank of England Governor Mark Carney reiterated that the bank is in no rush to raise rates.

(BusinessDesk)