By Rae Wee
SINGAPORE (Reuters) – The New Zealand dollar experienced significant gains on Thursday following a positive business outlook survey, while the U.S. dollar failed to maintain its momentum in anticipation of a crucial U.S. inflation report set to be released at the end of the week.
Friday’s release of the core personal consumption expenditures (PCE) price index – a key measure of inflation preferred by the Federal Reserve – is the highlight of a week that has been relatively quiet in terms of major market-moving data, resulting in currencies trading within narrow ranges.
The New Zealand dollar was a standout performer in the Asian session, reaching an eight-month high of $0.6295 after a survey revealed a significant increase in business confidence in August, reaching its highest level in a decade. It was last seen up by 0.73% at $0.6291.
“Business confidence has surged following the Reserve Bank’s recent shift in monetary policy,” said Michael Gordon, a senior economist at Westpac in New Zealand.
The Reserve Bank of New Zealand recently implemented its first rate cut in over four years and signaled the possibility of further cuts in the future.
In the broader market, the U.S. dollar struggled to stabilize after a 0.48% increase in the previous session, which some analysts attributed to month-end demand.
The euro edged closer to its 13-month high, trading at $1.1135. Sterling also saw gains, rising by 0.14% to $1.3209 and nearing its highest level since March 2022. The Australian dollar hovered near an eight-month peak, climbing by 0.27% to $0.6803.
The upcoming PCE release is expected to be the most significant event this week in the U.S., but its impact on market expectations for Federal Open Market Committee (FOMC) policy may be limited unless there is a significant deviation from forecasts, according to Carol Kong, a currency strategist at Commonwealth Bank of Australia.
Market participants have already priced in a 25-basis-point rate cut from the Fed next month, with a 34.5% chance of a larger 50bp reduction, as indicated by the CME FedWatch tool.
Lower U.S. rates in the near future have weighed on the dollar, which had been supported in recent years by the Fed’s tightening cycle and expectations of further rate hikes. The greenback has declined by approximately 2.9% this month, on track for its largest monthly drop in nine months.
The U.S. Dollar Index was last down by 0.07% at 100.94, reaching a 13-month low of 100.51 earlier in the week. The yen remained relatively stable at 144.67 per dollar, poised for a 3.7% gain for the month.
While the Fed is moving towards rate cuts, the Bank of Japan (BOJ) has indicated that it would continue raising interest rates if inflation remains on track, providing some support to the Japanese yen which had been under pressure due to significant interest rate differentials.
“With the Fed leaning towards rate cuts and the BOJ normalizing real policy rates, the yen is expected to move closer to its fair value of around 135,” said strategists at Lombard Odier.
Analysis:
The New Zealand dollar surged following positive business sentiment, while the U.S. dollar struggled ahead of a key inflation report. Market participants are anticipating a rate cut from the Fed next month, which has weighed on the dollar. The yen has remained stable amidst contrasting central bank policies. Investors should keep an eye on upcoming data releases and central bank decisions for potential impacts on currency markets.
