NZ dollar holds above 86c as US debt talks collapse

The NZ dollar has held up above US86c after the latest debt ceiling talks in the US collapsed. Photo / Mark Mitchell

The New Zealand dollar held above 86 US cents after a collapse of debt ceiling talks in Washington saw investors sell down their US dollar positions in favour of safe-haven assets.

Markets are likely to open on edge today with a Republican-controlled House of Representatives and the White House locked at an impasse on lifting the US$14.29 trillion government borrowing limit ahead of the August 2 deadline.

If the US is unable to lift the cap, the world's biggest economy will start defaulting on debt repayments. That sapped demand for the US dollar, with the Dollar Index, a measure of the greenback against six major currencies, fell to 74.25, down from last week's peak of 75.48.

"The US dollar will continue to be under downward pressure, and it's quite clear the greenback is no longer behaving as a safe haven currency," said Khoon Goh, head of market economics and strategy at ANZ New Zealand.

In the latest development, the AP is reporting President Barack Obama will now meet with the top Senate and House Democrats later today.

The White House said that Obama had invited Senate Majority Leader Harry Reid and House Democratic leader Nancy Pelosi to the Oval Office.

Both parties are scrambling to come up with a plan to avert an unprecedented government default.

House Republicans and Senate Democrats readied rival emergency fallback plans overnight as bipartisan talks deadlocked. Congress and the White House are seeking ways to cut the deficit in tandem with expanding the borrowing limit.

Investors looking for higher interest rate-yields on their investments underpinned support for the kiwi dollar, with the Reserve Bank of New Zealand expected to be the next central bank to start hiking rates after stronger first quarter growth figures and second quarter inflation numbers.

That puts Thursday's official cash rate meeting in the spotlight, with markets scouring the statement for hints as to when officials will start tightening policy.

"If we see an uplift in hawkish rhetoric and that opens the door for move in September then we'll see the kiwi break upwards," Goh said.

The kiwi recently traded at 86.29 US cents, up from 86.26 cents on Friday in New York, and was little changed at 73.81 on the trade-weighted index of major trading partners' currencies from 73.87. It rose to 79.60 Australian cents from 79.58 cents last week, and fell to 67.39 yen from 67.86 yen. It gained to 59.97 euro cents from 59.92 cents on Friday, and dropped to 52.82 pence from 52.95 pence previously.

Goh said the kiwi may trade between a range of 85.95 US cents and 86.75 cents.