Dollar sinks on Fed optimism, neutral RBNZ

The New Zealand dollar dropped more than 1 US cent after the Federal Reserve gave an optimistic outlook for the world's biggest economy, stoking talk of interest rate hikes next year, while the nation's own Reserve Bank signalled no rush to raise rates.

The kiwi fell to 77.90 US cents at 5pm in Wellington 78.51 cents at 8am and 79.37 cents immediately before the Fed release. The trade-weighted index declined to 76.07 from 76.84 yesterday.

The greenback rallied after the Fed confirmed it would end its asset purchase programme and cited strength in the labour market, one of its key measures of an improving economy. The local currency got a double-hit after Reserve Bank governor Graeme Wheeler confirmed the benchmark interest rate would remain on hold and toned down his bias for higher rates, implying a longer pause until he starts hiking again.

"The direction for the US dollar depends on the data and we're expecting that to remain relatively solid," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand in Auckland. "Seventy-seven (US cents) is still a decent support level for the kiwi dollar."

The RBNZ's Wheeler reiterated his view that the kiwi's strength is “unjustified and unsustainable” and that the local currency should go through "further significant depreciation" to limit the impact on the nation's tradable sector, and data today separately showed the central bank sold a net $30 million in September after its intervention in August.

Imre Speizer, senior market strategist at Westpac Banking Corp in Auckland, said the prospect of a strong greenback in the coming week opened up the opportunity for the Reserve Bank to intervene again, meeting one of the Reserve Bank's criteria in that it has a chance of succeeding

"We can say that they did not intervene in September - there was some wondering whether that was the case," Speizer said. "I wouldn't rule it out even in the next week two because it's all about being opportune, and they were handed an opportune gift from the FOMC (Federal Open Market Committee) this morning."

The local currency fell to 88.82 Australian cents at 5pm in Wellington from 89.33 cents yesterday, and dropped to 84.95 yen from 85.64 yen. It declined to 61.74 euro cents from 62.18 cents, and decreased to 48.75 British pence from 49.07 pence.

(BusinessDesk)