NZ dollar shrugs off dip

Last updated 09:10 19/12/2013

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The New Zealand dollar has shrugged off a drop against the greenback that happened following news the US Federal Reserve will start scaling back its economic stimulus package next month.

The kiwi dropped to US81.68c following the US Federal Open Market Committee's announcement this morning but has since bounced back to trade at US82.45c, slightly above where it was before the announcement.

The US central bank announced this morning it would start tapering its monthly asset purchases by US$10 billion (NZ$12b) from January. It has been buying $85b (NZ$103b) worth of bonds each month, which is tantamount to printing money, to support its economy.

After 15 months of quantitative easing the bank said this morning it would scale back its asset purchase to US$75b (NZ$90.9b) a month. It trimmed equally from mortgage and Treasury bonds.

Recent growth in jobs, retail sales and housing, as well as a fresh budget deal in Congress, had convinced a growing number of economists the Fed would trim the bond purchases.

The market had been paying close attention to the future of the quantitative easing programme since the Fed first signalled in May that it was looking to start scaling back its asset purchases.

However, the move was tempered by the suggestion the bank would leave its official interest rate lower for longer.

The central bank said it "likely will be appropriate" to keep rates near zero "well past the time" that the jobless rate falls below 6.5 per cent.

ANZ senior foreign exchange manager Sam Tuck said the market expected the US$10b cut.

"There's absolutely no reason why it shouldn't have tapered," he said.

The start to tapering was a positive step as it would keep the New Zealand dollar capped against the US dollar, Tuck said, but it did not change the strength of the kiwi.

The New Zealand economy was a "great news story".

Tuck said he expected the kiwi to trade between US81.80c and US83.20c today.

However, there could be some volatility in the currency market today.

NZ third-quarter GDP, due out this morning, was expected to be strong and the kiwi would remain strong heading into the Christmas period, he said.

The Fed policy meeting was the penultimate of Fed chairman Ben Bernanke's tenure. His second four-year term as chairman of the central bank expires on January 31, just two days after the close of the Fed's first policy meeting of 2014.

Janet Yellen, the Fed's vice chairwoman and a strong proponent of the Fed's aggressive response to the recession, is positioned to succeed Bernanke. The US Senate is expected to vote to confirm her for the post by the end of this week.

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- © Fairfax NZ News

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