NZ dollar drops to six-day low as greenback strengthens on optimism about US economy, tapering

The New Zealand dollar dropped to a six-day low in the face of a stronger greenback following a better-than-expected employment report and after confirmation in the Federal Reserve minutes of its last meeting that it plans to continue tapering.

The kiwi slid as low as 82.47 US cents following the 8am release of the Fed minutes from its meeting last month. The local currency was at 82.86 cents immediately before the 8am release from 82.88 cents at 5pm yesterday.

The US dollar index, which measures the greenback against a basket of currencies, extended gains after the Fed minutes allayed fears there may have been dissent amongst officials about plans announced at the last meeting to pull back the central bank's US$85 billion a month bond buying programme. Investors, buoyed by the earlier release of upbeat ADP employment data, then bought the greenback with more confidence.

"The markets were worried that there might be further conditionality and dissent in those minutes, but there wasn't", said Sam Tuck, senior FX strategist at ANZ New Zealand. "What we saw after that was a delayed reaction to the stronger ADP number.

"People had been putting off buying US dollars while those minutes were coming for fear that the minutes would negate some of the positive impact from the ADP and now that the minutes are in line with expectations and people can assume that the Fed, provided the US data continues on trend, will continue to taper, then they are more comfortable acting on the stronger data that occurred earlier in the night."

The ADP Research Institute report showed US employers added 238,000 payrolls in December, the biggest monthly gain since November 2012 and ahead of expectations for an increase of 200,000.

That buoyed expectations for tomorrow's release of the key US non-farm payrolls report, which is closely watched by the Fed.

"There's an expectation that tomorrow's non-farm payrolls release will be strong and show continued growth in the US economy," said ANZ's Tuck.

Today, the Bank of England the European Central Bank are expected to keep interest rates unchanged, although traders will be looking for the ECB to offer some hints of other measures it may take to further stimulate the region's economy, Kymberly Martin, markets strategist at Bank of New Zealand, said in a note.

The New Zealand dollar pared gains against other currencies following the 8am release of the Fed minutes.

The kiwi dropped to 92.69 Australian cents at 9am in Wellington, from 92.88 cents at 5pm yesterday, fell to 60.80 euro cents from 60.83 cents, slipped to 50.19 British pence from 50.53 pence and weakened to 86.54 yen from 86.93 yen.

The trade-weighted index declined to 78.29 at 9am from 78.50 at 5pm yesterday.

(BusinessDesk)