Dollar jumps after Fed pulls back forecast interest rate hikes

The New Zealand dollar jumped a cent against the US dollar after the US Federal Reserve pulled back its expectations for interest rate hikes this year, on concern about the impact of slower global growth.

The kiwi increased to 67USc at 8am in Wellington, from 66.04USc at 7am when the Fed statement was released, and 65.98USc at 5pm yesterday. The trade-weighted index rose to 71.65 from 70.83 yesterday.

The US dollar index, which measures the greenback against a basket of currencies, dropped to its lowest in more than a month after the Fed left the target range for the benchmark federal funds rate at 0.25% to 0.5% as expected and lowered its projected path for increases this year, citing the potential impact from weaker global growth and financial-market turmoil on the US economy.

The median of policymakers' updated quarterly projections, known as the dots, saw the rate at 0.875% at the end of 2016, implying two quarter-point increases this year, down from four forecast in December.

"The Federal Reserve left interest rates unchanged, as universally expected, but halved its expected degree of rate hikes in 2016, from four to two on a weaker growth outlook," ANZ Bank New Zealand senior economist Sharon Zollner and senior foreign exchange strategist Sam Tuck said in a note.

"The dovish surprise from the Fed sent US dollar sharply lower and New Zealand dollar squeezed harder than other currencies."

ANZ expects the kiwi to trade between 66.10USc and 67.60USc today.

The focus in New Zealand will now turn to today's release of fourth-quarter gross domestic product data, which is expected to show economic growth slowed to a 0.7% quarterly rate from a previous rate of 0.9%, and to 2.1% on an annual basis from 2.3%.

ANZ's expectation is below the consensus, for a 0.6% quarterly rate and a 2% annual rate.

"On the face of it such a growth rate is respectable, but it would barely keep pace with population growth," ANZ says.

"The quarter is expected to show solid growth in the construction, services and core manufacturing sectors offsetting weather-related weakness in primary sector production and manufacturing.

The ANZ says looking forward, tighter financial conditions and weak commodity prices look set to act as a brake on the economy, and it expects growth to slow below trend.

Elsewhere, employment data for February will be released in Australia today and is expected to show the unemployment rate held steady at 6%. The New Zealand dollar advanced to 88.90Ac from 88.47Ac yesterday.

The local currency advanced to 59.79 euro c from 59.43 euro c yesterday, gained to 47.08 British pence from 46.69 pence, increased to 4.3651 yuan from 4.3015 yuan and rose to 75.48 yen from 74.80 yen.

(BusinessDesk)