NZ dollar rallies sharply after soft US inflation data

The US Federal Reserve is expected to increase its Fed funds rate later this month. Photo / File

The New Zealand dollar rallied by more than one US cent after softer-than-expected US inflation data drove the greenback lower against most major currencies.

The US dollar index - which measures the greenback against a basket of currencies - fell to its lowest point in 15 months after data for June showed inflation slowed to 3 per cent, its lowest annual rate since March 2021.

Core US inflation fell to 4.8 per cent, year-on-year, from 5.3 per cent, year-on-year, in May.

By late afternoon the Kiwi was trading at US63.24c, having rallied by US1.3c from an early morning low of US61.88c.

Reserve Bank Governor Adrian Orr has witnessed an era of rising inflation and interest rates that rose too - until yesterday. Photo / Mark Mitchell, Herald graphic

BNZ economist senior economist Craig Ebert said the Kiwi’s sharp gain was on the back of the US dollar’s decline.

“US inflation decelerated more than anticipated so the big (US) dollar got marked downwards, and as a consequence the New Zealand dollar has gone up,” he said.

The financial markets still expect the US Federal Reserve to increase its Fed funds rate later this month, but today’s data raised the possibility it will pause at that point.

Previous expectations were that the Fed would raise rates twice before the end of the year. The Fed funds rate currently stands at 5.25 per cent.

The currency is now just over one US cent higher than where it was at the time of Wednesday’s announcement of an unchanged, 5.5 per cent official cash rate from the RBNZ.

Overnight, Canada’s central bank raised its official rate by quarter of a percentage point to 5.0 per cent.

It was the first time the Reserve Bank has not moved on rates for nearly two years.

ANZ said in a commentary the Fed was still on track for a 25 basis point July rate hike before holding rates steady at 5.25-5.5 per cent for an extended period.

“The faster moderation in inflation, and slowing momentum in the labour market indicated by last week’s non-farm payrolls, suggest clear progress is being made,” the bank said.

“The Bank of Canada’s recent moves signal both the challenges of getting inflation sustainably back to target and that recommencing hikes is always a possibility,” it said.

ANZ expects the RBNZ to follow suit and recommence hikes by the year’s end.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.