Dollar heads for 3.2% weekly gain as Yellen takes sheen off greenback

The New Zealand dollar is heading for a 3.2 percent weekly gain against the greenback after US Federal Reserve chair Janet Yellen's cautious outlook on the US economy saw investors dial back expectations for a rise in US interest rates and eroded demand for the world's reserve currency.

The kiwi rose to 68.96 US cents at 5pm in Wellington from 66.82 cents on Friday in New York last week. It hit a nine-month high 69.66 cents during Northern Hemisphere trading last night and was little changed from 68.99 cents yesterday. The trade-weighted index was little changed at 72.85 from 72.93 yesterday, and is heading for a 1.9 percent weekly gain.

Yellen urged caution on future rate hikes in her first public speech since the Fed scaled back its projected interest rate path last month. That pushed the greenback lower against most major currencies and investors are now awaiting US non-farm payrolls data on Friday US time to see whether that caution is warranted.

"If we get a bad number, the US dollar will weaken further as it becomes more and more compelling to sell," said Michael Johnston, a senior trader at HiFX in Auckland. If the US added 250,000 jobs last month and the 4.9 percent unemployment falls, Johnston expects the greenback will rally, but if there are fewer than 170,000 jobs added and joblessness increases, "then you'd see the US dollar under pressure and the kiwi nudging higher into the 69s."

Johnston said the strength of the kiwi is undermining the New Zealand Reserve Bank's bias towards lower interest rates by making imported products cheaper, lowering the rate of inflation, and while it's not at a level that warrants intervention it heightens the chance of another rate cut at this month's meeting.

"If they could wave their magic wand, they'd be lopping a good 5 cents off the kiwi," he said.

New Zealand's two-year swap rate edged up one basis point to 2.2 percent at 5pm in Wellington and 10-year swaps increased three basis points to 3 percent.

Traders will be watching next week's GlobalDairyTrade auction to see how prices for New Zealand's biggest export are tracking, having slumped over the past 18 months. A Fitch Ratings report today predicted milk prices won't recover until next year due to increased European production.

The kiwi fell to 4.4581 Chinese yuan from 4.4614 yuan yesterday after a manufacturing gauge showed China's industrial production shrank less than expected last month.

The local currency was almost unchanged at 90.15 Australian cents from 90.14 cents yesterday, and 77.52 yen from 77.53 yen. The kiwi fell to 60.58 euro cents from 60.96 cents yesterday and traded at 48.08 British pence from 48.11 pence.

(BusinessDesk)