Quick fade for dollar rally, Kiwi jumps

[July 08, 2014]  By Patrick Graham

LONDON (Reuters) - The outlook for monetary policy in the second half of 2014 dominated major currency markets on Tuesday, with the dollar's impetus from surprisingly strong U.S. jobs data last week already fading.

Fitch Ratings' upping of its outlook for New Zealand's debt rating drove a jump for the kiwi dollar, while poorer UK output numbers gave investors a chance to claim some of their profits on the past month's rally in sterling.

But as the market drifts into a summer lull, the balance of monetary policy on either side of the Atlantic is dominating debate and seen as the key to ending a long period of very low volatility and trading volumes.

The jump in new U.S. hiring, reported before the July 4 holiday, had provided a brief fillip to those still hoping that a surge in the dollar, widely forecast at the start of this year by the big investment banks, will finally materialise.

The U.S. currency eased against the euro on Monday and was struggling to make ground in Europe on Tuesday in the face of the latest signs of German opposition to more policy easing by the European Central Bank.

"We were looking for the dollar to struggle in the first half of the year, but as we head into H2 we have revised our forecasts to extend that theme into the third quarter," said Adam Cole, head of G10 currency strategy with RBC in London.

"Eventually we expect the USD trend to turn, and by 2015, we are looking for the kind of broad-based USD strength that the consensus was expecting in 2014."

The dollar edged higher against the euro, with the single currency trading 0.1 percent lower at $1.3591. Against a basket of currencies it was 0.1 percent higher at 80.28. It eased 0.1 percent to 101.775 yen.

SURPLUS

Germany's hugely positive balance of trade is one underlying reason for the euro's net five-cent gain against the dollar in the past 12 months, and it recorded a record trade surplus of almost 19 billion euros in May.

But broader signs of the strength of the euro zone's biggest economy were less positive - both exports and imports fell sharply. [ID:nL6N0PJ15J]

Airbus chief Fabrice Bregier's call for a 10 percent devaluation of the euro underlined the pressure on the European Central Bank to keep the supply of euros very high or even do more to support growth in months to come.
 

"The German data has been a bit disappointing and that is pointing the way to more pressure on the ECB to move again but I think people are still scratching their heads," said Rabobank strategist Jane Foley.

"There is a difficulty for the ECB in pushing the euro lower as long as the Fed is not clearly on the way to higher rates."

Fed policymakers Jeffrey Lacker and Narayana Kocherlakota are both due to speak later on Tuesday and will be eyed for signs of a shift towards a more hawkish bent following the jobs numbers.

For the ECB, the currency story also complicates its battle to keep euro zone inflation out of negative territory and closer to 2 percent, although its president, Mario Draghi, has said that the currency's 15 percent rise from 2012 lows has pushed down inflation by only 0.4 percentage points.

The New Zealand dollar jumped to an almost 3-year high against the greenback after Fitch affirmed its current ratings but upgraded its outlook to positive, citing fiscal consolidation and improving growth.

Dealers said the move, peaking at $0.8806, had taken out a number of option barriers at $0.8800. The kiwi, up almost nine percent since January on the back of steady increases in domestic interest rates, retreated thereafter but was still trading around a third of a percent higher at $0.8786.

(Editing by Hugh Lawson)

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