US dollar wobbles, kiwi steady despite rate cut expectations

[TOKYO] The US dollar held ground in Asian trade on Tuesday, underpinned by growing confidence that the US Federal Reserve could raise interest rates later this year, while New Zealand's dollar held steady despite an expected rate cut later this week.

Fed funds futures prices showed traders now see almost a 50-50 chance of a US rate hike by December, according to CME Group's Fed Watch tool. That compares with 30 per cent as recently as last week, before the better-than-expected nonfarm payrolls report on Friday.

The US dollar index, which gauges the greenback against a basket of six major rivals, erased earlier slight losses and edged up 0.1 per cent to 96.474.

It held well above last week's low of 95.003, which was its lowest since late June.

The US dollar was steady at 102.42 yen, a good distance above last week's low of 100.68 yen, while the euro edged down 0.1 per cent to US$1.1077.

"A lot of people are taking summer vacations in Japan this week, so volume is relatively low, and there aren't many market-moving factors," said Koji Fukaya, president of FPG Securities in Tokyo.

The Reserve Bank of New Zealand, meanwhile, is widely expected to cut rates by 25 basis points to 2 per cent at its policy meeting on Thursday, when regional forex liquidity is likely to be thinner than usual due to a public holiday in Japan.

Some 24 of 25 economists polled by Reuters are expecting an interest rate cut. Economists expect the policy rate to be 1.75 per cent by the fourth quarter and then to remain steady, although some are predicting rates are headed even lower.

"The market is pricing in 100 per cent probability of a cut at the Reserve Bank of New Zealand's meeting," Marshall Gittler, head of investment research at FXPrimus, said in a note.

"In fact it's pricing in 100 per cent probability of at least one more cut this year after this one, maybe even two more."

"But with the highest interest rates in the G10 and risk aversion calming down - meaning carry trades becoming popular again - they have a lot of cutting to do," Mr Gittler said, particularly since the market is also pricing in one more rate cut for the Australian dollar, the second-highest-yielding G10 currency.

The Australian dollar erased earlier gains and slipped 0.3 per cent at US$0.7625, while its kiwi counterpart was steady at US$0.7133.

The currencies largely shrugged off data from China, Australia's largest trading partner, showing consumer price inflation accelerated at its weakest pace in six months as food prices rose at a slower pace.

"The Aussie is off on the weak business confidence numbers from Australia. The Chinese numbers have had no effect," said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong.

National Australia Bank's monthly survey of more than 500 firms showed its index of business conditions dipped three points to +8 in July.

REUTERS