NZ dollar holds near two-month low on Fed rate view

The New Zealand dollar held near a two-month low as emerging signs of recovery in the US economy prompts the market to bet against the Federal Reserve keeping its near-zero interest rate target until 2014.

The kiwi fell as low as 80.63 US cents in local trading, and was at 81.02 cents at 5pm, up from 80.73 cents at 8am, and down from 82.09 cents yesterday. The trade-weighted index fell to 72.75 from 73.33.

The Dollar Index, a measure of the greenback against a basket of currencies, climbed 0.4 percent to 80.60 as a string of upbeat US data stoked optimism the world’s biggest economy is on the mend after economists yesterday upgraded expectations for fourth-quarter growth.

That has traders betting that Fed chairman Ben Bernanke won’t stick to his pledge to keep interest rates near zero until 2014, with 17 basis points of rises priced in over the next 12 months, according to the Overnight Index Swap curve. That saw a sell-off in US government bonds, which typically attract buyers when growth is weak, and the yield on 10-year Treasuries climbed 16 basis points to 2.29 percent.

“You’re seeing an unwinding of US bonds as no-one believes Bernanke will keep rates low until 2014,” said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional. “The kiwi’s looking a bit heavy” but is attracting buyers near the bottom of its 80 US cents to 85 cents range, he said.

Stocks on Wall Street have rallied on the upbeat appraisal of the US economy, with the Dow Jones Industrial Average extending gains from yesterday’s five-year high, though Kelleher pointed out that’s been on volumes that are about 25 percent lower than normal.

“If equities turn around, the kiwi’s going to get a double-whammy” as investors sell their riskier assets, he said.

The New Zealand dollar fell to 77.46 Australian cents from 77.79 cents yesterday and was little changed at 68.15 yen from 68.22 yen.

The kiwi declined to 51.72 British pence from 52.34 pence yesterday and decreased to 62.16 euro cents from 62.74 cents.