NZ dollar drops after dairy prices decline, Fed seen hiking rates next month

The New Zealand dollar dropped, hit by a double whammy as dairy prices declined further at the latest GlobalDairyTrade auction and after a report stoked speculation the Federal Reserve would hike interest rates next month.

The kiwi touched a low of 65.20USc this morning, and was trading at 65.33USc at 8am in Wellington, from 65.63USc at 5pm yesterday. The trade-weighted index fell to 69.66 from 69.96 yesterday.

The US dollar index, which measures the greenback against a basket of currencies, jumped higher after Wall Street Journal reporter Jon Hilsenrath quoted Federal Reserve Bank of Atlanta president Dennis Lockhart (who represents centrist views on the Fed) saying the US economy is ready for the first increase in interest rates and that it would take a significant deterioration in the data to convince him not to move in September.

The kiwi weakened further after whole milk powder prices sank 10.3% in the GDT auction overnight, raising concerns about the outlook for New Zealand's key export commodity as the country ramps up seasonal production in an environment of weak demand.

"It's bad for the kiwi," said Imre Speizer, senior market strategist at Westpac Banking Corp in New Zealand. "The Lockhart thing is a plus for the US dollar, all currencies will fall against the US dollar anyway, and bad milk means the kiwi underperforms everything else as well so there are two reasons for the kiwi to fall."

Mr Speizer said he expects the kiwi to fall below 65USc in the next day or two.

In New Zealand today, second-quarter labour market data is scheduled for release. The unemployment rate is expected to edge up to 5.9% from 5.8% as employment growth slows to 0.5% from 0.7% amid weaker labour demand, according to a Reuters poll of economists. Low inflation is expected to keep a lid on wage growth.

Auckland real estate agency Barfoot & Thompson is also scheduled to release its latest house sales data for June today.

The New Zealand dollar fell to 88.50Ac from 89.20Ac yesterday. The kiwi weakened against the Aussie after the Reserve Bank of Australia yesterday toned down its calls for a weaker currency, while data showed Australian retail sales were better than expected.

The kiwi slipped to 41.94 British pence from 42.04p yesterday, declined to ¥81.19 from ¥81.31 and was little changed at 59.98 euro cents from 59.92 cents.

(BusinessDesk)