The New Zealand dollar fell to $0.570 on Wednesday, wiping out the previous session’s gains and touching an eleven-week low, as a stronger US dollar followed a fresh wave of hawkish remarks from Federal Reserve officials. Richmond Fed President Tom Barkin cautioned that inflationary shocks could take considerable time to dissipate, echoing other policymakers’ concerns about stubborn inflation and bolstering the case for further monetary tightening in the US.
The US-driven move in FX markets overshadowed mounting expectations of additional tightening by the Reserve Bank of New Zealand. Markets are now pricing in a 75% probability that the RBNZ will deliver a third straight rate increase, taking the cash rate to 3.0% at its October meeting, after Governor Anna Breman warned that persistently higher oil prices could push near-term inflation somewhat above the central bank’s latest projections. At the same time, her emphasis on an uneven economic recovery highlighted the difficult trade-off between containing inflation and supporting a still-fragile domestic economy.
