Dollar gains as Yellen testimony leaves open prospect for lower rates

The New Zealand dollar gained after testimony by Federal Reserve chair Janet Yellen left open the prospect for low interest rates to remain in place for a few more months in the US, while better than expected Chinese manufacturing data stoked demand for the Australasian currencies.

The kiwi rose to 75.26 US cent at 5pm in Wellington from 74.66 US cents at 8am and 74.75 cents yesterday. The trade-weighted index advanced to 77.93 from 77.70 yesterday.

Yellen told a US congressional committee it can be patient in hiking interest rates, and that it was unlikely economic conditions will warrant an increase in the federal funds rate for at least the next couple of meetings. Investors ultimately interpreted her statement as increasing the chance rates would stay lower for longer after initially being unsure.

"She was actually saying there is no forward guidance and we will be data dependent, which meant the bears could read what they want and the bulls could read what they want, and the US dollar bulls were more forceful in expressing their view," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand in Auckland. "So the New Zealand dollar's tracked back."

Yellen has a second day of testimony before policy makers on Wednesday in Washington which will continue to be watched by markets.

The local currency dropped yesterday after the Reserve Bank of New Zealand's survey of expectations showed firms predicted a slower pace of inflation than previously anticipated, which ANZ's Tuck said prompted some traders to reassess New Zealand's interest rate track after central banks in Israel and Sweden recently cut rates.

"People are hyper-sensitive to Reserve Bank and are expecting them to follow the same path the same as everyone else who's tried to raise rates after the global financial crisis," he said.

Governor Graeme Wheeler today testified to policymakers in New Zealand on the bank's annual report, and refrained from commenting on the country's economic outlook due to next months' monetary policy statement.

Interest rates declined after Yellen's testimony yesterday, and New Zealand swap rates followed suit, with the two-year rate down to 3.55 at 5pm in Wellington from 3.58 yesterday, and the 10-year swap rate falling to 3.78 from 3.82.

Better than expected Chinese manufacturing also boosted the kiwi, with the HSBC preliminary purchasing managers' index rising to an expansionary 50.1. The kiwi gained to 4.7108 Chinese yuan at 5pm in Wellington from 4.6747 yuan yesterday. It fell to 95.53 Australian cents from 96.18 cents.

The local currency rose to 89.35 yen from 89 yen yesterday, and advanced to 66.31 euro cents from 65.95 cents. It gained to 48.63 British pence from 48.41 pence.

(BusinessDesk)