Kiwi likely to re-test US80c

The US Federal Reserve's decision to cut its key interest rate and indications more cuts are in the pipeline are likely to see the New Zealand dollar re-test US80c.

The Fed said it would lower the fed funds rate by 50 basis points (a half percentage point) to 3.00 per cent.

The monetary policy benchmark is now 225 basis points below its level prior to the Fed's series of rate cuts, now numbering five, which began last September.

The differential with New Zealand's Official Cash Rate is now 525 basis points, suggesting the so called carry-trade, where investors borrow in a low interest rate regime and invest in a high yielding one – is likely to intensify.

A cut of a half percentage point had been widely anticipated by investors hoping it might restore some confidence to the battered share market and maintain the flow of credit to businesses and households.

There had been some nagging anxiety that a smaller cut might have been announced after last week's surprise 75 basis point cut, the biggest cut for decades.

The Fed not only erased this source of concern, but further bolstered the market with an implied promise of more cuts to come.

In its statement, the Fed said its move, combined with the earlier cuts, "should help to promote moderate growth over time and to mitigate the risks to economic activity".

The Fed also said "downside risks to growth remain", and that it "will act in a timely manner as needed to address those risks", a clear signal that more cuts are on the agenda.

The share market reaction was initially positive – the US S&P 500 index put on more than one per cent in the immediate wake of the Fed's announcement. But it then turned down and ended a few points negative.

The New Zealand dollar jumped over one US cent to US79c, its highest level in two weeks but then eased back to US78.58c as Wall Street turned down..

Even before the Fed's announcement the kiwi had climbed overnight as the greenback fell to fresh two-week lows against a basket of major currencies, pressured by data showing the US economy last year grew at its slowest pace in five years.

Data showed that gross domestic product edged up at a weaker-than-expected 0.6 per cent annual rate in the fourth quarter and for the full year advanced only 2.2 per cent. That was the slowest annual growth since 1.6 per cent in 2002.

Such data suggests more rate cuts are on the cards.

"The language in the (Fed's) statement was fairly strong, suggesting the Fed is still worried with the possibility of further deterioration in the US economy," said Mark Meadows, analyst at Tempus Consulting in Washington DC.