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NZ dollar tumbles as Fed raises rates

NZ Newswire logoNZ Newswire 14/12/2016 Jonathan Underhill

The New Zealand dollar fell after the Federal Reserve raised its benchmark interest rate and signalled a faster pace of hikes in 2017 to allow for a bigger-spending Trump administration.

The kiwi dollar dropped to 71.46 US cents as at 8am in Wellington from 72.15 cents late on Wednesday. The trade-weighted index fell to 78.76 from 79.18.

The Fed raised the target federal funds rate by 25 basis points to between 0.50 per cent and 0.75 per cent, as expected, but also signalled three further increases in 2017.

The market had been expecting two, with more increases slated for 2018 and 2019 at the same pace to bring the benchmark rate up to 3 per cent. The Fed's statement said policymakers were unanimous on the hikes.

"The key point in the above is the Fed seeing three rate hikes in 2017 - they previously only saw two," traders at HiFX said. "The NZD-USD is lower in immediate response as the USD strengthened across the board."

Further currency market reaction is expected after Fed chair Janet Yellen elaborates on the Fed's views at a media conference. The central bank has to weigh the likely stimulus coming from a Donald Trump presidency and the effect that will have on the labour market and inflation.

The kiwi fell to 4.9380 yuan from 4.9797 yuan, it slipped to 67.61 euro cents from 67.80 cents, fell to 95.91 Australian cents from 96.24 cents, declined to 56.67 British pence from 56.98 pence and gained to 83.15 yen from 83.05 yen.

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