The short-term fix for the United States Government's debt problems was welcomed by investors the world over, but could end up pushing the New Zealand dollar higher, currency strategists said.
The kiwi traded at five-month highs yesterday amid relief that America had reached a temporary - albeit tenuous - solution to its fiscal impasse. Politicians have agreed to extend the US Government's debt ceiling to February 7 and to reopen the government until January 15.
The fiscal impasse came at a time when positive signs were starting to emerge in the US economy after five years and US$2 trillion ($2.37 trillion) worth of pump priming by the Federal Reserve in the aftermath of the global financial crisis.
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But uncertainty over how the US deals with its debt mountain, coupled with a two-week shutdown of the government's non-essential services, meant the US Federal Reserve was likely to start curtailing its quantitative easing activities in the first quarter of 2014, compared with the pre-crisis expectation of the end of this year.
The US stockmarket reacted to the news in a measured way, with the S&P500 share index gaining about 1.4 per cent. The local sharemarket was moderately firmer, the NZX50 index gaining 17 points to 4776.
"Most markets - as evidenced by the [firmer] US equity market - believe that the US economy will recover - in spite of Congress - it will just take longer," said ANZ Bank foreign exchange manager Sam Tuck.
The New Zealand dollar was at US84.20c in late trading yesterday, down from an earlier peak of US84.50c, and up from US83.89c in late local trade on Wednesday.
Since the fiscal stand-off began, the kiwi has been locked in a tight trading range around US82c to US83c.
Weakness in the US dollar was contrary to what investors would normally expect - a firmer greenback on the back of a positive fiscal development.
"I think what that tells us is that the fiscal impasse has done a lot of damage to the US dollar," said BNZ currency strategist Mike Jones.
He said the effect of the political stalemate was to push out the likely time that the Fed would start to wind back its fiscal stimulus measures.
"So it's kicked the can down the road, and all the while the US recovery is looking less and less assured," Jones said.
Jones said while the US dollar remained on the ropes, the kiwi was likely to march higher to US85c.
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Paul Bloxham, HSBC's chief economist for Australia and New Zealand, said a delay in the start of the Fed's wind-back of its bond repurchases could lead to further gains in the NZ dollar, as would this week's news of a 1.4 per cent annual rate of inflation.
Analysts said it was becoming harder to gauge the performance of the US economy, with some economic statistics still unavailable because of the Government's partial shutdown, and others skewed by the effects of federal workers being temporarily out of the workforce. It now appeared increasingly unlikely that there would be a wind-back in the US Federal Reserve's quantitative easing programme during the tenure of chairman Ben Bernanke, who leaves the job in January.
Instead, the decision to start tapering is likely to be one of the first to be made by Bernanke's replacement, Janet Yellen.
Before the fiscal impasse blew up, markets had expected to see a modest reduction in the US$85 billion a month bond repurchasing programme.
"It now looks like it will be a post-Bernanke decision," ANZ's Tuck said. "If that occurs, New Zealand has a great story," he said. "Economically we are very strong and the reasons for investors to rotate out of New Zealand assets has been diminished somewhat."
Delays in a pickup in the US economy would help accentuate the kiwi's reputation as a high- yielding currency, particularly against the backdrop of the likelihood of rate hikes from the Reserve Bank of New Zealand early next year, analysts said.
Despite America's debt problems, there was still no sign of the greenback being toppled as the world's number one currency, analysts said. APNZ