US dollar firmer before key inflation data, kiwi sinks as RBNZ holds rates

THE US dollar firmed up on Wednesday (Feb 28) as markets awaited a raft of global inflation data for clues on when central banks may start easing policy, while the New Zealand dollar tumbled after its central bank trimmed its forecast for a peak in rates.

The Aussie was also hanging at its lowest in over a week after inflation data came in softer than expected, reinforcing expectations that domestic interest rates are unlikely to increase further.

The data calendar looks light on Wednesday so analysts said markets were likely to focus on consumer inflation data from the US, Germany, France and Spain on Thursday ahead of euro area figures due on Friday.

“There’s more chance of disinflation ongoing in the euro area, which perhaps could open the door for an earlier cut from the European Central Bank,” said Danske Bank FX and rates strategist Mohamad Al-Saraf.

“We think if inflation is stickier in the US than it is in the euro area then the US dollar has to be strong.”

Higher-than-forecast inflation in the US has prompted markets to trim bets on the number of rate cuts expected from the Federal Reserve this year, while the chance of a cut in June now stands at around 60 per cent. At the start of the year, markets were almost fully pricing a rate cut in March.

That repricing has pushed the US currency higher in 2024, including against the euro. The single currency was last down 0.3 per cent against the dollar at US$1.0815.

The US dollar index, which measures the currency against six others including the euro, was last up 0.2 per cent at 104.07, having risen 2.7 per cent year-to-date.

With market expectations more closely aligned with the Fed’s latest projections and comments, traders would only respond if they see a trend break in tier one data, especially anything “hinting at growth weakness,” said Charu Chanana, head of currency strategy at Saxo.

The Reserve Bank of New Zealand (RBNZ) held the cash rate steady at 5.5 per cent, catching markets by surprise as policymakers said the risks to the inflation outlook have become more balanced.

The RBNZ also trimmed its forecast cash rate peak to 5.6 per cent from a previous projection of 5.7 per cent.

“With a cash rate at 5.5 per cent, the 10 basis points of wriggle room is simply there to remind us that they’ll hike if they need to but the bias is that they probably won’t,” said Matt Simpson, senior market analyst at City Index.

The kiwi slid over 1 per cent to its lowest since Feb 16 at US$0.6093 in response.

The Australian dollar also fell after data showed inflation at an annual pace of 3.4 per cent in January, unchanged from December and under market forecasts of 3.6 per cent.

Although inflation remains above the Reserve Bank of Australia’s (RBA) 2 to 3 per cent target, “it is close enough to expect the RBA to hold rates steady”, said Simpson.

The Aussie was last down 0.6 per cent at US$0.6502.

Elsewhere, sterling weakened to US$1.2657, down 0.2 per cent, while the yen slipped 0.1 per cent versus the greenback to 150.595.

“We’ve seen in the past when (US) dollar-yen trades above 150 that authorities start to give increased attention to the currency,” Danske Bank’s Al-Saraf said.

“But I would say right now there’s probably not intervention risk unless we see a sharp move in the yen again.”

In cryptocurrencies, Bitcoin was last up over 4 per cent at US$59,200, extending to its highest level since November 2021.

Ether rose 2 per cent to US$3,320. REUTERS