US President Donald Trump’s war of words against the Federal Reserve chairman Jerome Powell and his attempts to rearrange international trade continue to roil financial markets.
On Monday (NYT), Wall
Trump tariffs: New Zealand dollar gains US5c in three weeks amid US turmoil
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The Kiwi dollar has gained about US5c in less than three weeks. Photo / 123rf
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Trump, on his Truth Social platform on Monday, called Powell “Mr Too Late” and said he should lower interest rates “NOW”.
The President has repeatedly criticised Powell for not lowering interest rates quickly enough, while Powell has stood his ground.
US media reported that Trump and his team were continuing to look at whether they could fire the Fed chairman.
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BNZ senior market strategist Jason Wong said US equities, US Treasuries and the US dollar have all been rated by the markets as a sell.
“In terms of equities, the situation is that we are quite far removed,” Wong said.
“Our sharemarket is quite different and it has not performed over the last couple of years, so there has been a disconnect.”
US Treasuries – the main benchmark for the world’s credit markets – have seen sharp rises in yield.
In New Zealand, 10-year bond yields have also gained, but the impact has been more muted. In bonds, prices move inversely to yields.
“The most powerful force at the moment is on the currency side, where the US dollar is falling against almost everything,” Wong said.
He said the market was taking a view that the trade policy approach was going to upset the US economy and that recession risk had become heightened.
“The other dynamic is structural, where Trump is chipping away at the bedrock that the US economy has been built on – free trade, free capital flows and an independent Federal Reserve,” Wong said.
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“All these sorts of things are under threat, so the risk premia around US assets has increased and the weaker US dollar is a byproduct of all that.
“Over the last decade, the US dollar and the US economy has outperformed and everyone has been long [on] US dollars, wanting a piece of the action, so that trade is just beginning to unwind.”
ANZ chief economist Sharon Zollner said the market was trying to separate political rhetoric from reality.
“The market is trying to work out whether this is bluff and bluster in trying to bully Powell into easing or, if that’s not successful, whether it’s providing a fall guy for when the US economy takes the inevitable hit from these tariffs,” Zollner said.
“The question for the New Zealand bond market is to what extent will we get caught up in it all, because bond yields are highly correlated.”
The New Zealand dollar typically has fallen in times of weaker global economic growth, providing a buffer for the primary export sector.
“All things being equal, if the New Zealand dollar is not going to be the shock absorber that it has been for weaker global economic growth, that means the Offical Cash Rate has more work to do,” Zollner said.
Independent economist Cam Bagrie said on NZME’s The Country radio show that central banks needed to remain independent.
“If there is one that that lies at the crux of any economy, it is the independence of the central bank,” Bagrie said.
“What we are seeing at the moment is a fair bit of political interference over what the Fed could or should be doing,” he said.
“Markets are getting pretty concerned here about what’s going on in regard to what has been a pretty well-functioning system.”
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
