New Zealand Dollar declines as US Dollar gains on Fed rate hike bets
- NZD/USD depreciates as rising Fed rate-hike bets continue to bolster the US Dollar.
- New Zealand’s PSI reached 51.2 in August, marking three consecutive months of expansion and the highest reading since September 2023.
- BusinessNZ CEO Katherine Rich cautioned that three sub-indices remain below 50, indicating a fragile recovery ahead.
NZD/USD falls after registering modest gains in the previous day, trading around 0.5780 during European hours on Monday. The pair depreciates as the US Dollar (USD) gains support amid aggressive Federal Reserve (Fed) rate-hike bets for Wednesday’s decision following hotter US inflation reports.
The US Consumer Price Index (CPI) accelerated in August, reinforcing expectations that the US central bank will raise interest rates next week. The CME FedWatch tool suggests that the financial markets have priced in nearly an 87% probability of a quarter-point rate hike at the Fed's September meeting, up from 59% a week ago.
FOMC set for first rate hike since 2023 as US inflation stays above target
Brown Brothers Harriman’s Elias Haddad notes that the Fed is “poised to deliver a 25bps hike to a target range of 3.75%-4.00% on Wednesday after five straight holds, marking its first hike since July 2023.” He argues that “persistently above-target US inflation and a stable labor market justify a rate increase,” setting the stage for a renewed tightening step by the FOMC.
According to the BNZ – BusinessNZ Performance of Services Index (PSI), New Zealand’s services sector continued to expand in August, extending its run of growth to three consecutive months. The PSI for August reached 51.2, rising slightly from 50.6 in July and 50.9 in June. This reading matches the level seen in December 2025 and marks the highest the index has been since September 2023.
Commenting on the results, BusinessNZ CEO Katherine Rich noted that while it is encouraging to see the PSI post its strongest reading since returning to growth, the recovery remains fragile at 51.2. She added that with three of the five sub-indices remaining below 50, further progress is needed before a solid turnaround can be declared.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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