NZ dollar advances as Fed's Yellen seen continuing asset purchases

The kiwi was little changed at 84.15 US cents at 8am in Wellington from 84.13 cents at 5pm yesterday.

The New Zealand dollar advanced as investors bet the US Federal Reserve will continue to pull back on its quantitative easing programme even as chair Janet Yellen signalled the world's largest economy will need support for some time.

The kiwi rose to 86.73 US cents at 8am in Wellington, from 86.55 cents at 5pm yesterday. The trade-weighted index edged up to 80.91 from 80.86 yesterday.

Yellen signalled considerable slack is still present in the US economy and the labour market, with most Fed officials seeing the equilibrium level of unemployment between 5.2 per cent and 5.6 per cent, below the current 6.7 per cent. Still, Bank of New Zealand currency strategist Raiko Shareef said it took just 13 months for the US unemployment rate to fall by a similar amount to the current level, in line with Yellen's recent comments that interest rate hikes could come six months after an end to the Fed's quantitative easing programme.

Investors "have taken Fed chair Janet Yellen's dovish comments in stride this morning because even as she says the Fed is short of reaching its employment and inflation goals, she is still committed to tapering asset purchases at each successive meeting," Kathy Lien, managing director of FX strategy for BK Asset Management in New York, said in a note. "We believe that most of this week's US economic reports will show a continued recovery in the US economy."

Tonight, investors will be eyeing the US ISM manufacturing index.

In Asia today, the focus will be on China's official manufacturing PMI for March at 2pm New Zealand time and the final reading of the HSBC version at 2:45pm.

The New Zealand dollar weakened to 93.49 Australian cents from 93.75 cents yesterday ahead of the Reserve Bank of Australia's decision on interest rates at 4:30pm New Zealand time today. The central bank is expected to keep the benchmark rate at 2.5 per cent and reiterate that rates will remain stable.

The kiwi touched a fresh six year high of 89.52 Japanese yen overnight. The local currency was trading at 89.48 yen at 8am from 89.03 yen yesterday.

Demand for the yen may be softer as tensions ease between Russia and the Ukraine and on speculation that Japanese asset managers will reallocate into domestic equities and international assets in the new financial year which begins today, BNZ said.

The New Zealand dollar was little changed at 52.01 British pence from 52.04 pence yesterday and unchanged at 62.95 euro cents after weaker than expected European inflation in March.