Fed 'easing' gives kiwi dollar unexpected boost

Described as the electronic equivalent of running the printing presses, the US Federal Reserve's announcement this week that it will create a huge amount of US dollars out of thin air has given other currencies, including the kiwi dollar, a boost.

The Fed said it would buy US$300 billion of long-dated US Treasuries over the next six months, its first large-scale buying of government debt since the early 1960s.

The move, "quantative easing" as it is called, amounts to a large-scale increase in the amount of US cash in existence and has stoked fears, and in some cases hopes, it will result in inflation.

The US dollar weakened sharply, falling 3 per cent against a basket of currencies on Thursday (NZ time) and falling a further 1.5 per cent that night.

That has been reflected in the kiwi, which gained more than 5 per cent in just two days, rising from around US53c before the news to US55.79c late yesterday afternoon, having peaked above US56c at a two-month high on Thursday night.

"It's telling you something about how weak the global financial system is when you get to these measures," said ANZ Bank chief economist Cameron Bagrie.

Deutsche Bank currency strategist John Horner said the US dollar's weakness was consistent with what had been seen after similar moves by other central banks, including the Bank of England.

While the kiwi's move was almost entirely down to US dollar weakness, it and the aussie slightly outperformed some other currencies.

"Belief that the Fed's actions might help boost economic prospects has seen some improvement in risk sentiment, hence the aussie and New Zealand dollar have been helped," said Horner.

However, Bagrie and Horner said the kiwi's gains, while probably likely to continue in the near term, would be reversed over time to reflect the currency's gloomy fundamentals.

Bagrie had been forecasting the kiwi would be around the US45c mark by the end of the year. The Fed's move, dramatic as it was, merely altered the timing of his expectations.

"I keep coming back to the New Zealand economy and we have got a huge current account deficit. It would be incredible if the New Zealand dollar kept going up in that environment. We need a weaker currency to get that rebalancing and growth."

But AXA head of investment strategy Keith Poore, who recently produced a research note arguing that the world economy desperately needed a dose of inflation, saw potential now for the US to continue weakening over the medium term with occasional episodes of strength as fresh bouts of bad news prompted risk-aversion trades.

"In general, it will be good for the globe, weak monetary policy should flow into global inflation and, hopefully, global asset prices to some degree. It should be be good for global growth which, as an exporting nation, will be good for New Zealand."

Horner, however, cautioned against seeing the Fed's move as "a magic bullet that suddenly fixes all that ails the global economy".

"We don't think that will be the case."