NZ dollar drops to two-week low on Fed meeting

If the Federal Reserve starts tapering its bond buying programme next month, it would strengthen the greenback.
If the Federal Reserve starts tapering its bond buying programme next month, it would strengthen the greenback.

The New Zealand dollar fell to a two-week low after minutes of the Federal Reserve's last meeting signalled the central bank may start tapering its bond buying programme next month, a move that would strengthen the greenback.

The kiwi fell as low as 78.44 US cents, and was trading at 78.47 cents at 8am in Wellington, from 79.87 cents at the 5pm market close yesterday. The trade-weighted index slipped to 74.01 from 74.64 yesterday.

The US dollar index, which measures the greenback against a basket of currencies, advanced after the Fed minutes showed there was broad support for chairman Ben Bernanke's plan to pull back on stimulus even as some officials felt patience was required on the timing. Most investors are betting the tapering of the Fed's US$85 billion a month bond buying programme could start as early as next month.

"The Fed is in general consensus that they do need to start tapering soon although we still don't know the exact date," said Stuart Ive, senior client advisor foreign exchange and derivatives at OM Financial.

"It means the US dollar will start strengthening and hence why the kiwi continues to weaken and that is what we have seen overnight. We have still got plenty of room to move to the downside."

The New Zealand dollar is seeing initial support at 78.40 US cents, although it could slide as far as 77 cents in the next few weeks should US economic data continue to improve, said OM Financial's Ive.

In the US tonight, traders will be eyeing reports on manufacturing and weekly unemployment claims.

Ahead of that at 1:45pm local time, all eyes will be on the HSBC/Markit Flash PMI Manufacturing report for August, which is expected to show an improvement of 48.2 from 47.7, signalling a slowdown in the Chinese economy is stabilizing.

An improvement may cause a bounce in the kiwi and the Aussie against the US dollar, although the kiwi could weaken against the Australian dollar, said OM Financial's Ive. China is Australia's largest trading partner. The New Zealand dollar slipped to 87.35 Australian cents at 8am in Wellington from 87.76 cents yesterday

The local currency weakened to 58.75 euro cents from 59.11 cents yesterday ahead of a report tonight which is expected to show an improvement in European manufacturing activity.

The New Zealand dollar fell to 76.74 yen from 77.31 yen yesterday and dropped to 50.06 British pence from 50.64 pence.

- BusinessDesk

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