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New Zealand Dollar to USD at Three-Week High on Rate Hike

New Zealand Dollar to USD at a three-week high at 0.6512 during trading hours on Tuesday, May 31 as the RBNZ rises policy rates to 2% to tame high inflation.

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New Zealand Dollar to USD Trades at 0.65 as RBNZ Hikes Rates

The Reserve Bank of New Zealand has hiked interest rates to 2%. The RBNZ has taken a hawkish stance and hints at another immediate rate hike.

During the pandemic in March 2020, the NZD/USD reacted with high volatility and slid to 0.5470. It, however, recovered to 0.7466 levels in February 2021.

The New Zealand Dollar to USD, which dropped to multi-month lows in May 2022 to 0.6216 on May 12, has been recovering. On May 27, it surged to a three-week high of 0.6512 on the rate hike announced by the RBNZ.

NZD/USD at Three-Week High
NZD/USD at Three-Week High

New Zealand Hikes Rates to 2%

It is the fifth consecutive rate hike as the central bank takes steps to tame high inflation.

The official cash rate is up by 50 basis points, increasing from 1.5% to 2.0%. The Reserve Bank further indicates that the cash rate may double by next year. The aggressive approach reflects the intensity of high inflation and soaring commodity prices. Inflation has become a critical issue to be addressed, and people need money to buy essential goods.

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Almost all countries have hiked their interest rates. For New Zealand, it is the first hike in seven years. Economists had predicted a hike of 0.5% in policy rates. The NZD/USD currency pair shot up to $0.6550 on May 27 on the aggressive policy taken by the RBNZ.

RBNZ Governor Adrian Orr said inflation may peak at 7.0% by the next quarter. Apart from inflation, production capacity has come down with supply chain disruptions. Business confidence is down, showing that global economic uncertainty from the Ukraine war is disrupting the economy.

Economic activity in China rebounds with the easing of Covid-19 restrictions. The government has announced measures to stimulate the economy and bring it back to the pre-pandemic levels. Major Chinese cities like Shanghai and Beijing are expected to show positive momentum in business activities. It is positive news for the New Zealand Dollar to USD as demand for goods and services from China will increase.

High Inflation Hits New Zealand Dollar to USD

The annual inflation rate soared to 6.9% for the quarter ended March 2022. It was 5.9% in March 2021. Recreation, housing, and food sectors are the worst affected.

The government has announced that lower-income families will get financial help to overcome the global inflation storm. Prime Minister Jacinda Ardern says that the New Zealand economy has survived the covid-19 shock better than other countries.

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NZ Business Confidence Dips

Business confidence has come down from -42% to -55.6%. It is the 11 consecutive report of negative growth in the country. Exports have come down, and employment figures are down from 9.4 to 6.1. Residential construction work has been poor.

House prices are falling as high inflation in the country. The Ukraine war is affecting global growth causing economic uncertainty.

New Zealand business services index is down from 51.5 to 51.4. There is a slight contraction in the performance of business activities, especially in new orders and inventories. 4.7% of businesspeople expect a contraction in their businesses in the next 12 months.

The quarter-to-quarter retail sales performance shows poor performance, dropping from 8.3% to -0.5%. Lower consumer spending reflects a decline in the overall economic activity of people.

Supply constraints have lowered business activities. Businesses are expected to show contraction in the months to follow as crude supply has come down. The business manufacturing index slid from 53.7 to 51.2.

After the covid pandemic, New Zealand has reopened its territory to tourists. New Zealand welcomes tourists from Britain, the US, Canada, Japan, and other countries. The country receives more than 3 million tourists annually, accounting for more than 20% of its foreign income. By removing tough border restrictions, the country hopes to renew its tourism sector.

The AUD/NZD trades at 1.1025 during trading hours on the forex market on Tuesday, May 31.

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UK Fights Escalating Costs

The escalating cost of living in the United Kingdom drags household spending lower.

UK Chancellor Rishi Sunak introduced a support package to help households manage their cost of living crisis. The one-off payment scheme will help individuals tide over the high inflation, says Sunak.

The US Dollar Index Trades Above 100  Levels

Fighting inflation is the prime priority of the Fed, says Fed Chairman Jerome Powell. The greenback is holding on to the psychological 100 levels. On the last day of May 2022, the Dollar Index trades at 101.75 during trading hours on the forex market.

Analysts predict that New Zealand will be slow to recover. Commodity currencies like the New Zealand Dollar and the Australian Dollar will be slow to rise amid the Ukraine war and the after-effects of the Covid-19 pandemic.

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