Dollar rallies as investors chase yield after ECB rate cut; US jobs data looms

The New Zealand dollar rose as investors sought bigger returns after the European Central Bank cut its key deposit rate into negative territory, and ahead of US employment figures.

The kiwi traded at 84.86 US cents at 5pm in Wellington from 84.99 cents at 8am, up from 84.41 cents yesterday. The trade-weighted index advanced to 79.11 from 78.90 yesterday. The local currency was little changed on the week, from 84.97 US cents last Friday in New York and 79.19 on the TWI.

The ECB became the first major central bank to charge fees on deposits and unveiled a 400 billion euro stimulus plan to support an economy threatened by deflation. That prompted investors to seek higher yields elsewhere, stoking demand for risk-sensitive currencies such as the Australian and New Zealand dollars.

"It's another major economy with zero or negative rates, and that caused a surge for yield elsewhere," said Michael Johnston, senior trader at HiFX in Auckland. "We're range-trading with a downside bias - we'll nudge lower but we'll have periods of strength."

Next week's Reserve Bank of New Zealand policy review will remind investors local interest rates are rising, with governor Graeme Wheeler expected to hike the official cash rate a third time to 3.25 percent. Still, recent declines in dairy prices will put the forecast track for the key rate under scrutiny to see whether the central bank slows down its anticipated tightening.

The ECB decision comes ahead of the May US non-farm payrolls release in Washington, which may come in weaker than previously anticipated after a private payrolls report disappointed investors earlier this week.

HiFX's Johnston said the kiwi should come under pressure in the medium term as the US economy recovers, and investors regain confidence in the greenback.

The local currency edged up to 62.14 euro cents from 62.05 cents yesterday, and was little changed at 50.48 British pence from 50.39 pence. It was unchanged at 90.90 Australian cents from a day earlier, and gained to 86.81 yen from 86.53 yen.

(BusinessDesk)