NZ dollar tumbles, swaps, bond rates

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The New Zealand dollar shed more than 1 US cent while bond and swap rates rose after the Federal Reserve raised its benchmark interest rate and signalled a faster pace of hikes in 2017.

The kiwi dollar dropped to 71 US cents as at 5pm in Wellington from 72.15 cents late yesterday. The trade-weighted index fell to 78.55 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 when the market was expecting two.The US dollar index rose to a 14-year high but the kiwi's decline only brings it back to levels at the start of December, with traders saying the local currency is caught between the opposing forces of a strong greenback and rising commodity prices.

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"What the Fed has actually said and (Federal Reserve chair) Yellen said at the press conference is all still very cautious," said Philip Borkin, senior economist at ANZ Bank New Zealand. "They don't yet know the detail of Trump's policies. They've gone from two hikes to three. When you step back it's not a major shift of view from the Fed."

"There's a tug of war at the moment - the US dollar is a headwind but that's also boosting commodity prices," Borkin said. Next week's economic growth data will likely underpin the strong New Zealand story, he said. The kiwi may also benefit from the "Xmas effect", where it has shown a tendency to rise over the festive season.

The Reserve Bank is forecasting a 0.9 per cent gain for gross domestic product in the third quarter, which is above some market expectations.

The yield on the US 10-year Treasury bond climbed to its highest level in more than two years after the Fed announcement. The yield on the 10-year New Zealand government bond rose as high as 3.43 per cent, the highest since early January. The two-year swap rate rose 7 basis points to 2.34 per cent and the 10-year swap rate surged 13 basis point to 3.54 per cent.

The kiwi fell to 4.9283 yuan from 4.9797 yuan late yesterday. It slipped to 67.60 euro cents from 67.80 cents and fell to 95.70 Australian cents from 96.24 cents. The local dollar fell to 56.67 British pence from 56.98 pence and gained to 83.39 yen from 83.05 yen.