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The New Zealand dollar hit a two-month high after the Reserve Bank of New Zealand raised interest rates
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Traders are betting that the Fed may not raise interest rates in May
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Focus shifts to the US Nonfarm Payrolls on Friday
(Updates throughout, graphic adds)
By Amanda Cooper
LONDON (Reuters) – The dollar tumbled near two-month lows on Wednesday after weak data supported the view that the Federal Reserve may not need to raise interest rates much more, while the New Zealand dollar hit a two-month high after a larger rally. . An expected increase in the interest rate.
With only two days to go until the release of the US monthly employment report, activity across the market was much quieter than it has been in recent weeks.
The Reserve Bank of New Zealand unexpectedly raised interest rates by 50 basis points to a 14-year high of 5.25%. In a Reuters poll, 22 out of 24 economists expected a rise of just 25 basis points.
The kiwi rose 1.1% to a two-month high of $0.6383 after the decision, before retreating. It was last up 0.1% at $0.6316.
“The Kiwi outperformed overnight — the RBNZ never fails to surprise the hawkish side — that’s really the main theme, other than everything is range trading, which is what we were expecting a few days before major US data,” said Adam Cole, senior Currency Analysts at RBC Capital Markets”.
New Zealand now has one of the highest interest rates among the G10, surpassing both the United States, at 5%, and Canada, at 4.50%.
In theory, this creates an opportunity for traders to borrow in a lower-yielding currency such as the yen to fund lending in a higher-yielding currency, a game known as “carrying,” which could directly benefit the kiwi.
“We kind of like the idea that it’s going to come into play a little bit in the future,” Cole said. He added, “We are seeing a degree of price fragmentation in the G10 that we have not seen since the financial crisis and more price fragmentation means that transfers should start to become more important going forward.”
As other central banks catch up with the Fed, the dollar is likely to lose much of its interest rate advantage over other currencies and weaken this year, according to a Reuters poll of foreign exchange strategists on Wednesday.
The dollar index, which measures the performance of the greenback against six others, hit a two-month low of 101.43. It was last up 0.1% to 101.59, after falling 0.5% the day before.
shaken by posts
Data on Tuesday showed that employment opportunities in the United States fell to their lowest level in nearly two years in February, indicating that high rates are beginning to put pressure on the labor market.
The Monthly Employment Turnover and Job Opportunities Survey (JOLTS) report showed that employment opportunities, a measure of labor demand, fell by 632,000 to 9.9 million on the last day of February, below expectations at a reading of 10.4 million.
“Yesterday’s JOLTS data could be the first sign of weakness in the US labor market and that’s huge,” said Craig Erlam, strategist at OANDA.
He added, “Without that, the Fed will find it very difficult to make the argument that it is pausing the tightening cycle. Now it needs support and Friday’s jobs report can start that process.”
The dollar has been in a steady decline since September, but in the past week, the pace has picked up. The greenback has fallen in 16 of the last 25 trading sessions. According to Refinitiv data, this number of up days has not been consistently surpassed by down days in a five-week period since around July 2020.
Markets are now pricing in a 59% chance that the Fed will leave interest rates unchanged at the next policy meeting in May, up from a 43% chance the day before.
The economy appears to be slowing, but the central bank likely has more room to raise interest rates, said Loretta Mester, chair of the Cleveland Federal Reserve, on Tuesday.
Apart from the kiwi, other major currencies have been less volatile.
The euro settled at $1.0948, below Tuesday’s peak in two months, while the pound fell 0.2% to $1.2479, after hitting a 10-month high the previous day.
And the dollar headed for a third daily loss against the Japanese yen, as it fell 0.3% to 131.20, while the Australian dollar fell 0.8% to 0.67 dollars, a day after the central bank left interest rates unchanged at 3.6% after 10 consecutive rises, saying it needed more. . It’s time to assess the impact of previous increases.
(Reporting by Ankur Banerjee in Singapore; Editing by Shri Navaratnam, Sonali Paul, and Muralikumar Anantharaman)