Market Analysis

The New Zealand dollar posted strong gains on Thursday, buoyed by an optimistic business outlook survey, while the U.S. dollar struggled to maintain its momentum ahead of a crucial U.S. inflation report at the week's end.

Friday's release of the core personal consumption expenditures (PCE) price index—the Federal Reserve's preferred inflation gauge—has become the focal point in an otherwise quiet week for major market-moving data, leaving most currencies trading within narrow ranges.

However, the New Zealand dollar stood out in the Asian session, reaching an eight-month high of $0.6295 after a survey revealed that business confidence in New Zealand surged in August to its highest level in a decade. The kiwi was last trading at $0.6291, up 0.73%.

"Business confidence has rebounded significantly following the Reserve Bank's shift in monetary policy," commented Michael Gordon, a senior economist at Westpac in New Zealand.

Earlier this month, the Reserve Bank of New Zealand implemented its first rate cut in over four years and indicated that further cuts might follow.

"We don't believe a single OCR (official cash rate) cut could have such a substantial impact on the economic outlook. Instead, this likely reflects how pessimistic businesses had become earlier in the year," Gordon added.

In the broader currency market, the U.S. dollar struggled to find support, after rising 0.48% in the previous session, a move that analysts partially attributed to month-end positioning.

The euro edged back towards its 13-month high, last trading at $1.1135. The British pound increased by 0.14% to $1.3209, remaining close to Tuesday's peak of $1.3269, its strongest level since March 2022.

The Australian dollar also neared an eight-month high, gaining 0.27% to $0.6803.

"The PCE report is undoubtedly the most significant U.S. data release this week, but it's unlikely to significantly alter market expectations for the FOMC unless it deviates substantially from expectations," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Markets have fully priced in a 25-basis-point rate cut from the Fed next month, with a 34.5% chance of a more substantial 50bp reduction, according to the CME FedWatch tool.

Investor expectations for imminent U.S. rate cuts were further reinforced by Fed Chair Jerome Powell's remarks at Jackson Hole last week, where he suggested that the "time has come" to cut rates, echoing recent signals from other Fed policymakers.

The anticipation of lower U.S. rates next month has weighed on the dollar, which had previously been bolstered by the Fed's aggressive tightening cycle over the past two years.

The U.S. dollar index has since dropped about 2.9% this month, on track for its steepest monthly decline in nine months.

The dollar index was last down 0.07% at 100.94, after hitting a 13-month low of 100.51 on Tuesday.

The Japanese yen was little changed at 144.67 per dollar, poised for a 3.7% gain for the month.

In contrast to the Fed's expected easing, policymakers at the Bank of Japan (BOJ) have signaled that the central bank may continue raising interest rates if inflation remains on target, offering some support to the yen, which has been under pressure due to significant interest rate differentials.

"With the Fed nearing rate cuts and the BOJ moving towards normalizing still-negative real policy rates, the USD/JPY should move closer to its fair value of around 135," strategists at Lombard Odier noted.

Paraphrasing text from "Reuters" all rights reserved by the original author.