Australia, NZ dollars struggle as Fed outlook, trade war fears take toll

[SYDNEY] The Australian dollar hit a one-month low on Friday while its New Zealand cousin was also downbeat as investors favoured the greenback over most major currencies amid diverging monetary policy outlooks and fears of a global trade war.

The Australian dollar went as deep as $0.7454, a level not seen since mid-May after skidding about 1.4 per cent on Thursday - its biggest single day percentage loss in 4-1/2 months.

For the week, the Aussie is so far down 1.7 per cent and is set for its worst weekly showing since early February.

The New Zealand dollar sank to a two-week low of $0.6948.

It is down one per cent this week, the biggest loss since late April. It was last off 0.3 per cent at US$0.6952.

The losses in the antipodeans came after the US Federal Reserve lifted its benchmark rate to 1.75-2 per cent at a two-day meeting that ended Wednesday and signalled it would tolerate above-target inflation at least through 2020.

Policymakers are now projecting two more rate increases by the end of this year, compared to one previously.

In contrast, the Australian central bank has clearly indicated that rates are on hold at a record low 1.5 per cent for as long as the eye can see. Its New Zealand counterpart is also set to keep rates at 1.75 per cent for a long time to come.

"What's important here is that the divergent economic outlooks are driving a reconsideration of which regions offer the best return opportunities," said Greg McKenna, chief market strategist at AxiTrader.

"Against that backdrop, and with many offshore investors holding a jaundiced view of the outlook for the Australian economy... the AUD/USD is under pressure once again."

Investors also bid the US dollar after the European Central Bank indicated it would keep interest rates steady at least through the summer of 2019.

There were also concerns about a Sino-US trade war with US President Donald Trump almost certain to impose "pretty significant tariffs" on Chinese goods. Beijing has warned it was ready to respond if Washington chose to ratchet up trade tensions.

Investors fear a full-blown global tariff war could derail global growth, and the export-heavy economies of Australia and New Zealand are seen as particularly vulnerable.

The New Zealand dollar was not helped by local data, with a private survey showing manufacturing activity growth had weakened in May.

New Zealand government bonds gained, sending yields 4.5 basis points lower towards the long end of the curve.

Australian government bond futures rose, with the three-year bond contract up 1.5 ticks at 97.850. The 10-year contract added 3.5 ticks to 97.2975.

REUTERS