New Zealand Dollar Rises to 2½-Month High

The New Zealand dollar rose to $0.591, extending its rebound to reach its highest level since early June, as the US dollar weakened further amid reduced expectations for a Federal Reserve rate hike. An unexpectedly weak US retail sales report led traders to trim bets on the Fed raising interest rates next month, sending the greenback lower. The kiwi is also supported by expectations that the Reserve Bank of New Zealand will deliver another quarter-point rate increase next month after repeatedly stressing the need to withdraw some of its policy support. However, a string of weak economic data has raised fresh questions about how much further the RBNZ can continue tightening policy. Meanwhile, ongoing tensions in the Middle East are keeping investors cautious. Fresh Israeli attacks on Tehran-backed Hezbollah in Lebanon, along with threats of additional US sanctions on Iran, clouded the prospects of an imminent peace deal.

The New Zealand dollar rose to $0.587, rebounding from a two-week low, as traders continued to price in an RBNZ rate hike next month. The central bank has repeatedly stressed the need to withdraw some of its policy support, keeping expectations for another rate increase firmly in place. However, soft economic data this week raised fresh questions over the extent to which the RBNZ may continue tightening policy. New Zealand’s manufacturing PMI fell to 54.3 in July from 60.1 in June, with a majority of business comments turning negative. This followed data showing that one-year inflation expectations fell to 2.6% in Q3 from 3.4% in Q2, while the two-year measure, which the RBNZ watches most closely, eased to 2.3% from 2.5%. This suggests that inflation expectations remain contained and that there is a lower risk of higher oil prices spilling over into broader inflation. Despite the rebound, the kiwi is down 0.3% this week, following two consecutive weeks of gains.

The New Zealand dollar dropped to $0.585, its lowest in two weeks, as a decline in inflation expectations raised doubts about how far the Reserve Bank will need to go in its tightening cycle. Two-year inflation expectations, a key timeframe for monitoring how RBNZ monetary policy filters through to prices, fell to 2.3% in Q3 from 2.5% in Q2, while one-year inflation expectations fell to 2.6% from 3.4%, indicating that expectations remain anchored. Still, the central bank is widely expected to raise interest rates again in September after signaling the need to make policy less accommodative. Also pressuring the kiwi, the greenback firmed despite a subdued US inflation report, which reduced the likelihood of policy tightening by the Federal Reserve next month. Investors also remained cautious as talks between the US and Iran appeared to have reached an impasse, with both sides hardening their positions, while President Donald Trump said the US has “total control” over Hormuz.