UPDATE: NZ dollar tumbles after Yellen firms on rate rise   18 Dec 2014

UPDATE: NZ dollar tumbles after Fed's Yellen indicates rate hikes are coming

By Paul McBeth

Dec. 18 (BusinessDesk) - The New Zealand dollar tumbled about 1 US cent after US Federal Reserve chair Janet Yellen indicated higher US interest rates are coming, and was more upbeat about the state of the world's biggest economy.

The kiwi recently traded at 76.88 US cents, dropping from 77.90 cents before Yellen's press conference after traders initially thought the Federal Open Market Committee implied rates would stay low for a considerable time. The kiwi spiked from 77.24 cents immediately before the Fed statement.

Yellen told reporters in Washington the central bank probably won't hike interest rates in the next two meetings, but does want to move to a more normal monetary policy setting after running the federal funds interest rate in a range of between zero and 0.25 percent since the financial crisis in 2008. The Fed expects to lift rates provided the US retains its economic momentum and plunging oil prices don't stifle inflation too much, though Yellen said she anticipates monetary policy will remain accommodative for some time.

"Pretty much all the FOMC members believe rate hikes will start next year," said Michael Johnston, senior dealer at HiFX in Auckland. "The path of least resistance for the kiwi is certainly lower, and that's probably going to continue. I wouldn't be surprised in the next months if it goes under 70 cents."

Before Yellen's conference traders were confused by the FOMC's tweaked statement, which dropped the expectation for rates to stay low for a "considerable time", instead saying it will "be patient in beginning to normalise the stance of monetary policy". The US dollar has been a favourite among traders since the middle of the year in the anticipation of higher interest rates.

Stuart Ive, senior dealer foreign exchange at OMF in Wellington, said the Fed is "clearly considering" raising rates, though it will be data-dependent, and was upbeat on the economic outlook for the US, particularly in the labour market.

Traders are also waiting for New Zealand's third-quarter gross domestic product data, which is forecast to show the economy grew 0.7 percent in the three month period, an unchanged pace from the June quarter.

(BusinessDesk)

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