NZ dollar falls from week-high as Fed's Powell sticks to 'gradual' rate hike view

The kiwi declined to 67.82 US cents as at 8am in Wellington. Photo: Lynn Grieveson

The New Zealand dollar fell from a week-high after Federal Reserve chair Jerome Powell told legislators the central bank will continue to raise interest rates gradually with the world's biggest economy in good shape.

The kiwi declined to 67.82 US cents as at 8am in Wellington from 68.30 cents yesterday. The trade-weighted index slipped to 72.83 from 73.07.

Powell told US Senators in a semi-annual testimony on monetary policy that the US economy is continuing to grow at a strong enough pace to warrant further increases to the federal funds rate, supported by President Donald Trump's fiscal stimulus. He said it was hard to predict what the trade war between the US and China will mean for the economy, and his comments were seen as unlikely to deter further rate hikes.

"The inclusion of the phrase 'for now' suggests that the Fed will become more data dependent as the fed funds rate approaches neutral and may speed up hikes, if inflation moves 'persistently' above target, or stop them completely, say if downside growth risks materialise," Bank of New Zealand senior markets strategist Jason Wong said in a note. "The NZD has since drifted back overnight from 0.6840 to 0.6785 amid broad-based USD strength – the Bloomberg dollar index is up 0.4 percent on the day – but it has retained most of its gains on the crosses."

The kiwi rose to a week-high yesterday after the Reserve Bank released its sector factor model of underlying inflation, which showed a bigger increase than the official consumers price index. That was seen as reducing the already small chance of a cut to the official cash rate.

"With the market having been more focused on the risk of a negative surprise to the CPI data and the risk the next move in the OCR could be down – and positioned accordingly – the sectoral factor model provided a major surprise," Wong said.

Overnight, prices at the Global Dairy Trade auction fell 1.7 percent, although whole milk powder prices increased 1.5 percent.

The kiwi traded at 91.77 Australian cents from 91.84 cents yesterday and fell to 4.5452 Chinese yuan from 4.5600 yuan. It was little changed at 76.53 yen from 76.67 yen yesterday and rose to 51.70 British pence from 51.55 pence. The kiwi traded at 58.13 euro cents from 58.28 cents yesterday.