Kiwi dollar holds gains after surprise rate hike projection; dollar steady

FILE PHOTO: Rolled Euro banknotes are placed on U.S. Dollar banknotes
FILE PHOTO: Rolled Euro banknotes are placed on U.S. Dollar banknotes in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration

May 26, 2021

By Elizabeth Howcroft

LONDON (Reuters) -The New Zealand dollar was up more than 1% on Wednesday, holding on to gains after the central bank hinted at a possible interest rate hike by September 2022, while the U.S. dollar was steady near 5-month lows.

The Reserve Bank of New Zealand (RBNZ) surprised many market participants by projecting that it might hike interest rates as early as September next year.

The New Zealand dollar jumped to a three-month high on the news and held onto these gains during the Asian session. At 1049 GMT it was up 1.1% at 0.73075.

The Australian dollar – which is seen as a liquid proxy for risk appetite – was up 0.4% at 0.778.

So far, the Reserve Bank of Australia (RBA) has stressed that its policy will stay super loose for an extended period, with no hike seen until 2024 at the earliest.

“I think markets going forward will start to question the RBA’s commitment to its ‘no hikes before 2024’ and so there’ll be some positive spillover into the Aussie,” said Adam Cole, chief currency strategist at RBC Capital Markets, noting that markets were “very sensitive” to rates cycles.

“Canada we’re already there, essentially. The CAD outperformance this year has all been about the market pricing in the first steps to tighter policy in Canada so in the commodity block the Aussie is probably a laggard with scope to catch up.”

The dollar index was steady at 89.734, having fallen over the past two months as investors expect low U.S. rates to drive cash abroad to capture the gains from other countries recovering from the pandemic.

Federal Reserve officials reiterated that they would not change their ultra-supportive monetary policy stance any time soon – although San Francisco Federal Reserve Bank President Mary Daly told CNBC that they were “talking about talking about tapering”.

China’s onshore and offshore yuan strengthened to three-year highs versus the dollar. The onshore currency broke through 6.40 – a key psychological level – to trade at 6.39.

A day earlier, China’s major state-owned banks had bought dollars at that level in a move viewed as an attempt to cool the rally, sources said.

The Japanese yen was steady, changing hands at 108.88 per U.S. dollar.

The euro slipped slightly against the dollar, down 0.1% on the day at $1.22375 but still close to its highest since January.

Commerzbank strategist You-Na Park-Heger wrote in a note to clients that the euro was becoming more attractive, but she does not see scope for much further gains before the June 10 European Central Bank meeting.

In cryptocurrencies, bitcoin was up 3.3%, having earlier risen above $40,000. Ether was up 4% at around $2,800, close to where it started the month.

Iran has banned the energy-intensive mining of cryptocurrencies such as bitcoin for nearly 4 months, as the country faces major power blackouts in many cities.

(Reporting by Elizabeth Howcroft; Editing by Giles Elgood and Alex Richardson)