NZ dollar gains on dovish US outlook, ahead of OCR

The New Zealand dollar rose after the dovish assessment of the state of the US economy by Federal Reserve saw markets continue to bet against the greenback. That comes ahead of today's Official Cash Rate announcement, where the Reserve Bank is expected to keep interest rates on hold.

The US Federal Open Market Committee said the pace of recovery in world's biggest economy remained "moderate", promoting it to leave rates unchanged and the US$600 billion bond purchasing progamme known as QE2 on track to finish at the end of June.

The move, while in line with what markets were expecting, saw the US dollar continue to slide after Fed chairman Ben Bernanke downplayed inflationary pressures from commodities and fuel as "transitory". The dollar index, a measure of the greenback against a basket of six currencies, fell to 73.49, its lowest level since August 2008.

"The tone of the statement was a bit more dovish than expected," said Mike Jones, a markets strategist at Bank of New Zealand. "That saw markets revert to their favourite theme of late of selling US dollars and buying the yield currencies such as the New Zealand and Aussie dollar."

Reserve Bank Governor Alan Bollard is expected to maintain the official cash rate at a record low of 2.5 per cent today, giving the New Zealand economy more time to recover from the effects of the Christchurch earthquake.

"If we see any acknowledgement from the bank that New Zealand is experiencing a once in a lifetime terms of trade boom, and that it brings with it some inflationary pressures, then we should see the (NZ) dollar go higher," Jones said.

The kiwi rose to 80.65 US cents from 80.58 cents yesterday, and fell to 68.86 on the trade-weighted index of major trading partners' currencies from 69.00. It declined to 74.23 Australian cents from 74.51 cents yesterday, and climbed to 66.21 yen from 65.90 yen.

It fell to 54.59 euro cents from 54.93 cents yesterday, and dropped to 48.53 pence from 48.99 pence previously.

The kiwi dollar is expected to trade between 80.20 US cents and 81.20 cents, according to Jones, with the bias towards the upside.