The New Zealand dollar fell as investors bet expectations for the Federal Reserve to delay tapering its monetary stimulus programme until March next year had already been priced into the markets.
The kiwi slipped to 82.49 US cents at 8am in Wellington, from 82.64 cents at the 5pm market close yesterday. The trade-weighted index was little changed at 76.25 from 76.20 yesterday.
The US dollar index, which measures the greenback against a basket of currencies, rose as investors bet markets had priced in a delay to tapering following a government shutdown this month. The Federal Reserve Open Market Committee is expected to announce tomorrow that it will continue its US$85 billion a month bond buying programme, which has weighed on the greenback.
The kiwi "felt the pinch of a broad-based rally in the greenback overnight, as investors lighten US dollar short positions ahead of tomorrow morning's US FOMC meeting," Mike Jones, currency strategist at Bank of New Zealand, said in a note. "Markets are now in a holding pattern ahead of the Fed decision."
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Investors who buy a short trade are anticipating that a currency will decline in value. The Fed committee will announce its decision at 7am New Zealand time tomorrow following a two-day meeting.
"No-one is expecting any change in policy, but we might see a few words reshuffled to reflect the less upbeat US economic outlook," said the BNZ's Jones. "Tapering of Fed asset purchases still looks like a story for next year to us. The biggest risk currency markets face is probably that a less dovish than expected statement revives the US dollar.
"The speculative community went outright short the US dollar last week for the first time since February," Jones said. "Some of these short positions were undoubtedly bought back overnight as investors factored in the risk of a less dovish Fed."
In New Zealand today, Prime Minister John Key is speaking at a luncheon in Wellington.
The Reserve Bank is scheduled at 3pm to publish its balance sheet data for September which will show its net purchases and sales of the currency.
The local currency advanced to 80.95 yen from 80.57 yen yesterday after Japanese reports showed household spending, small business confidence and retail trade were stronger than forecast.
"This has sent the yen weaker as the policies of Abenomics gain traction", ANZ New Zealand agri economist Con Williams said in a note.
The kiwi was little changed against other currencies, at 87 Australian cents from 86.94 cents yesterday, at 60.01 euro cents from 59.98 cents and at 51.41 British pence from 51.35 pence.