Kiwi tumbles after US Fed hints at interest rate hike

Janet Yellen is upbeat about the state of the US economy. Photo / AP

The New Zealand dollar tumbled about US1c after US Federal Reserve chair Janet Yellen indicated higher US interest rates are coming, and was more upbeat about the state of the world's biggest economy.

The kiwi was trading at US76.88c yesterday morning, down from US77.90c before Yellen's press conference after traders initially thought the Federal Open Market Committee implied rates would stay low for a considerable time.

By 5pm yesterday the kiwi had regained some ground and was trading at US77.13c.

Yellen told reporters in Washington the central bank probably won't hike interest rates in the next two meetings, but does want to move to a more normal monetary policy setting after running the federal funds interest rate in a range of between zero and 0.25 per cent since the financial crisis in 2008.

The Fed expects to lift rates provided the US retains its economic momentum and plunging oil prices don't stifle inflation too much, though Yellen said she anticipated monetary policy would remain accommodative for some time.

"Pretty much all the FOMC members believe rate hikes will start next year," said Michael Johnston, senior dealer at HiFX in Auckland. "The path of least resistance for the kiwi is certainly lower, and that's probably going to continue. I wouldn't be surprised in the next months if it goes under 70c."

Before Yellen's conference traders were confused by the FOMC's tweaked statement, which dropped the expectation for rates to stay low for a "considerable time", instead saying it will "be patient in beginning to normalise the stance of monetary policy".

The US dollar has been a favourite among traders since mid-year in the anticipation of higher interest rates.

Stuart Ive, senior dealer foreign exchange at OMF in Wellington, said the Fed was "clearly considering" raising rates, though it would be data-dependent, and was upbeat on the economic outlook for the US, particularly in the labour market.