NZ dollar gains as investors pick gradual US rate rise

The New Zealand dollar gained as markets wagered new US Federal Reserve chair Jerome Powell will remain measured in his first testimony this week. Picture / Kenny Rodger

The New Zealand dollar gained as markets wager new US Federal Reserve chair Jerome Powell will remain measured in his first testimony this week, adding to the view that the Fed will only lift interest rates three times this year.

The New Zealand dollar rose to US73.18c at 5pm from US72.85c at 8am and US72.88c on Friday in New York. The trade-weighted index was at 75 versus 74.84.

Powell will testify before the House of Representatives and Senate committees this week in his first semi-annual testimony on the monetary policy report, which was released on Friday and any comments will be closely scrutinised for any clues on where US interest rates might head this year.

Last week the US dollar pushed higher when minutes from the latest US Federal Reserve rate-setting committee meeting showed growing confidence in the need to keep raising interest rates at its last policy meeting, with most believing that inflation would perk up. That led some market participants to speculate about four possible rate increases this year.

However, Friday's monetary policy report helped shore up expectations the Fed will tighten gradually, leading the yield on the 10-year US Treasuries to pull back to about 2.86 per cent, well off the four-year high of 2.96 per cent, and leading the market to once again focus on three possible rate increases.

"We are seeing the US 10-year unwind a bit and generally, there is a weak US dollar across the board," said Martin Rudings. The risk is that the yield on 10-year US Treasuries falls to 2.65 per cent and "that will weaken the US dollar if that eventuates", he said.

Overall, 10-year US Treasuries are "probably overcooked a little bit and the market needs to relax that trade", Rudings said.

Markets will also be keeping a close eye on the Fed's favoured measure of inflation, the core personal consumption expenditure or PCE index due early Thursday in the US.

The local currency gained to A93.10c from A92.89c on Friday in New York and increased to 4.6204 Chinese yuan from 4.6148 yuan. It traded at 52.28p from 52.15p last week and at 59.43 euro cents from 59.27 cents. The kiwi was at 77.96 yen from 77.88 yen last week.

New Zealand's two-year swap rate fell 2 basis points to 2.15 per cent while 10-year swaps dropped 4 basis points to 3.20 per cent.