NZ dollar heads for 1.4 per cent weekly gain on Fed's cautious inflation view

The New Zealand dollar is headed to a 1.4 per cent weekly gain. Photo / File

The New Zealand dollar is headed to a 1.4 per cent weekly gain after some market participants pared back their expectations for US interest rate increases next year after the Federal Reserve sounded a note of caution this week on low inflation.

The kiwi traded at 68.75 US cents as at 5pm in Wellington from 68.76 cents late yesterday and 67.79 cents a week ago. The trade-weighted index was at 72.49 from 72.53 late yesterday.

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The kiwi benefited after minutes from the US Federal Reserve's latest meeting coupled with comments from Fed Chair Janet Yellen on persistently low inflation knocked the US dollar back this week. Trading, however, was extremely thin today ahead of Thursday's Thanksgiving Day holiday in the US, in particular as many people take Friday off as well.

"There is very little to work off. We have seen tight ranges, as you would expect with these holiday-thinned markets. The kiwi has moved in a 15-point range all day. It is very, very quiet," said Mark Johnson, a senior dealer at OMF.

While he said the kiwi is looking reasonably resilient and "the selling pressure we have seen for an extended period has probably been exhausted," he also said it remains a sell on rallies as there is little reason for it to sustain a break higher.

Also, the weakness in the US dollar may not have much "longevity," in particular as the December rate hike remains fully priced in and Yellen's comments may be discounted to some degree as she is due to stand down with the appointment of her successor, he said.

"The important thing will be to see how the dot plots will work out for next year," he said referring to the US Federal Reserve's fan chart showing the range of possible outcomes for interest rates.

The kiwi traded at 58.03 euro cents from 58.16 cents yesterday and at 90.22 Australian cents from 90.29 cents yesterday. It was at 51.72 British pence from 51.57 pence, 4.5299 yuan from 4.5328 yuan and traded at 76.62 yen from 76.53 yen.

New Zealand's two-year swap rate lifted 1 basis point to 2.15 while the 10-year swap rate lifted 1 basis point to 3.09 per cent.