Dollar slips as greenback grows

Federal Reserve chairwoman Janet Yellen's move to end the controversial monthly bond purchase programme has boosted the greenback. Photo / AP

Market pricing out likelihood of more NZ interest rate rises

The outlook for the New Zealand dollar took another bearish turn yesterday after the US dollar spiked higher on the back of an upbeat economic assessment from the Federal Reserve and the market started to price out the likelihood of more rate rises from the Reserve Bank.

The US Federal Reserve's Open Market Committee's (FOMC) move to end its controversial monthly bond purchase programme signalled a major sea-change for the world's biggest economy, boosting the greenback and in turn making the kiwi and several other currencies buckle.

The FOMC said economic activity in the US was expanding at a moderate pace with solid job gains and a lower unemployment rate.

The news out of the US dealt the kiwi a blow, having already suffered from the effects of sharply lower dairy prices, a bout of intervention from the Reserve Bank in August, and persistent "jawboning" from Governor Graeme Wheeler to get the currency lower.

Just hours before the Reserve Bank's 9am official cash rate review, the currency dropped by US1c to US78.4c, then fell further to US77.7c when the bank released a more "dovish" than expected outlook. At one point the currency was down by 2 per cent from late on Wednesday before recovering a little to US77.9c by 5pm yesterday.

As the bank kept its OCR at 3.5 per cent, Wheeler's repetition of its previous warning about the exchange rate, to the effect that its level remained "unjustified and unsustainable", added to the selling pressure.

"But the lion's share of that [weakness] can be attributed to the US dollar's strength on the back of FOMC's statement," said Bank of New Zealand currency strategist Raiko Shareef.

"The FOMC was more upbeat than anyone had expected and really pushed back against those who expected a softer stance following the global jitters that we had earlier this month," he said.

The bank's comments on rates had "essentially removed a tightening bias".

"The market was already mildly bearish on the NZ dollar and this simply threw fuel on the fire," he said. "It reinforces the message that the NZ dollar does not have too much of a leg to stand on."

BNZ expects the currency to be US78c by the end of this year, falling to US73c by the end of 2015. At yesterday's level, the currency has dropped by US10.4c or 11.8 per cent since hitting US88.36c in July.