NZ dollar gains as Fed dovishness drags the greenback down

The kiwi was trading at 65.96 US cents. Photo / 123RF

The New Zealand dollar is heading for a gain of more than 1 US cent for the week as the greenback continued to slide after the Federal Reserve turned dovish earlier this week.

The kiwi was trading at 65.96 US cents at 5:05pm in Wellington from 65.89 at 7:45am and 64.89 in New York last Friday. The trade-weighted index was at 72.14 points from 72.05.

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"There's a race to the bottom on interest rates across the globe and the US has just jumped on that bandwagon," says Peter Hunt, foreign exchange and interest rate sales manager at Kiwibank.

Early Thursday, New Zealand time, the Fed removed the word "patient" from its outlook and said it is prepared to do whatever is "appropriate to sustain the expansion" as the US economy starts to show signs of weakness and the US-China trade war wages on.

The market is hoping that a meeting between US President Donald Trump and Chinese President Xi Jinping at the upcoming G20 meeting in Japan will pave the way for the two nations to settle their trade differences.

Also helping buoy the kiwi were comments yesterday by Reserve Bank of Australia governor Philip Lowe who said in a speech that the rate cut in Australia earlier this month will support the economy.

The RBA cut its cash rate from 1.5 per cent to 1.25 per cent from June 5.

Lowe said another rate cut "is not unrealistic to expect" but he also called on the government to use fiscal policy through spending on infrastructure to help get Australia closer to full employment.

Next week, it will be the turn of New Zealand's Reserve Bank to review its official cash rate. In May, when it cut the OCR from 1.75 per cent to 1.5 per cent, RBNZ suggested the chance of another cut was "finely balanced."

Westpac is predicting the RBNZ will keep the OCR steady next week and that it will cut again in August.

"The balance of risks has evolved in the direction of another cut, mainly due to global developments," says Westpac chief economist Dominick Stephens.

"But not so emphatically that the RBNZ needs to appear panicked by cutting the OCR again so soon."

The New Zealand dollar was trading at 95.14 Australian cents from 95.15 cents, at 51.92 British pence from 51.86, at 58.37 euro cents from 58.34, at 70.63 yen from 70.70, and at 4.5253 Chinese yuan from 4.5134.

The New Zealand two-year swap rate edged down to 1.2813 per cent from 1.2848 yesterday, while the 10-year swap rate eased to 1.7075 per cent from 1.7175.