Dollar heads for 3.5% weekly drop as US economy shines

The New Zealand dollar is heading for a 3.5 percent weekly decline against the greenback as the strength of the US economy was reinforced by Europe's central bank rolling out a bigger than expected quantitative easing package to reinvigorate the moribund Eurozone.

The kiwi fell to 75.14 US cents at 5pm in Wellington from 77.88 cents on Friday in New York last week. It traded at 75.07 cents at 8am and 75.25 cents yesterday. The trade-weighted index rose to 77.24 from 77.08 yesterday, and is heading for a 3.1 percent weekly decline.

The European Central Bank announced a 60 billion monthly bond buying programme in a bid to stimulate the regional economy and stoke inflation. The programme exceeded expectations, which had been built up by the unexpected removal of the Swiss National Bank's cap on the franc last week and interest rate cuts by the Danish and Canadian central banks this week. The kiwi rose to 66.12 euro cents from 64.83 cents yesterday.

While the outlook for the global economy has been a little gloomier, the US is expected to remain robust, with the International Monetary Fund predicting growth in the world's biggest economy this year will outpace most of its developed nation peers. That's continued to stoke demand for the greenback, and the Dollar Index, a measure of the currency against a basket of peers, climbing to the highest level since September 2003, and was recently at 94.16.

"The US economy is head and shoulders above the rest of the world - Japan's running ultra-loose monetary policy at the moment and Europe just brought out QE," said Paul Webber, senior dealer foreign exchange at OMF in Auckland. "The US dollar's strength is going to flow through to weaker currencies - for the euro sub-1.10 and possibly parity, while the kiwi should go into the low 70s at some stage later this year."

Slower than expected inflation data earlier this week stoked speculation New Zealand's Reserve Bank may lower interest rates this year, and traders are pricing in 9 basis points of cuts over the coming 12 months, according to the Overnight Index Swap curve. Governor Graeme Wheeler will review the 3.5 percent official cash rate next week, and is expected to keep it on hold.

OMF's Webber said traders will be looking to see whether the central bank drops its tightening bias, which might spur a knee-jerk sell-off in the kiwi.

New Zealand's two-year swap rate increased to 3.6175 from 3.61 yesterday, and the 10-year swap rate advanced to 3.7475 from 3.74.

The local currency was little changed at 4.6752 Chinese yuan at 5pm in Wellington from 4.6740 yuan yesterday after the HSBC and Market Economics' preliminary reading of the purchasing managers' index showed industrial production picked up in the world's most populous nation this month, increasing to 49.8, still indicating contracting activity.

The kiwi rose to 93.61 Australian cents from 93.24 cents yesterday after oil prices rose on reports Saudi Arabia's King Abdullah died. Australia's exports are heavily focused on resources-based commodities.

The local currency was little changed at 88.92 yen at 5pm in Wellington from 88.99 yen yesterday, and climbed to 50.04 British pence from 49.68 pence.

(BusinessDesk)