Dollar little changed as further rate cut seen, key Fed meeting looms

The New Zealand dollar was little changed, having clawed back some ground from yesterday's selloff, as traders look ahead to a US Federal Reserve meeting next week that may be the start of a return to 'normal' monetary policy in the world's biggest economy.

The kiwi dollar traded at 63.07 US cents as at 5pm in Wellington, little changed from the start of the day and up from 62.62 cents. The trade-weighted index barely shifted at 68.48 from 68.40.

The market is divided on whether the Fed will lift interest rates next week, having kept them near zero since 2008. Federal funds futures contracts put the odds of an increase at just 35 percent, yet a Bloomberg survey yesterday showed 38 of 78 economists polled expect a hike following the Sept. 16-17 meeting. The biggest impediments to a US rate hike have been steadily eroding, as employment data improves and inflation edges back toward levels the Fed wants to see before it will raise borrowing costs.

"The Fed's objective is to normalise monetary policy," said Mark Johnson, a senior dealer at OMF. "They've told us that every meeting is 'live' and all the ducks are lined up."

Johnson said the increase in US interest rates is going to be "a very gradual process. It's not as if they've seen explosive growth" in the US economy.

While it is a matter of when not if the Fed hikes interest rates, the Reserve Bank of New Zealand's projections for the 90-day bank bills suggest governor Graeme Wheeler has at least one more quarter point cut up his sleeve, which would reduce the official cash rate to 2.5 percent. That would be a return to its record low level last seen in early 2014. The Reserve Bank of Australia is also seen as having less scope to cut rates again, meaning a move by the RBNZ would narrow the interest rate differential with the RBA's cash rate of 2 percent.

"The kiwi remains a sell on any rallies," Johnson said.

The New Zealand dollar fell to 89.19 Australian cents from 89.49 cents yesterday. It had dipped yesterday after stronger than expected Australian employment data and following the RBNZ statement.

The kiwi rose to 4.0161 yuan from 3.9986 yuan. The local currency rose to 76.13 yen from 75.54 yen and was little changed at 40.77 British pence from 40.79 pence. It was little changed at 55.81 euro cents from 55.86 cents.

The two-year swap rate was unchanged at 2.72 percent and 10-year swaps rose 3 basis points to 3.6 percent.

(BusinessDesk)