NZ dollar rides higher on Powell's dovish testimony

There was a 1.1% surge in the cost of dental services, but prescription drug prices fell 0.6%. The broader CPI climbed 0.1%, also more than projected, and 1.6% annually. The oil and gas sector as well as defensive stocks led the gains.

Fed Chair Powell said that "uncertainties since [the] June FOMC continue to dim [the economic] outlook", a not-so-subtle hint that the US-China trade war is hurting the economy.

"This argues against aggressive monetary stimulus from the central bank", said Chris Rupkey, chief economist at MUFG in NY.

"To call something hot, you need to see some heat", he said, adding that the economy can tolerate a lower jobless rate than the Fed previously thought.

The CPI report showed prices for used cars and trucks rose 1.6% from the prior month, and 1.2% from a year earlier. The CAC 40 in France added 0.1% to 5,575. It's a prospect that has delighted investors, who have lifted stock indexes to record highs.

Prospects of a U.S. interest rate cut also spurred investors towards riskier assets, with the S&P 500 briefly crossing the 3,000-point mark for the first time.

Some questioned how much momentum there was behind the latest rally.

"Local equity markets are reveling in the best of both worlds this morning as local investors love nothing more than lower US interest rates and a weaker USA dollar", Stephen Innes of Vanguard Markets said in a commentary.

"The bottom line is the economy is in a very good place and we want to use our tools to keep it there".

Trump has been constantly criticizing Powell and the Fed for keeping the benchmark interest rate high, which he said hampered his administration's expansionist economic agenda.

Markets are now pricing in a 25-basis-point cut at the Federal Open Market Committee's next session on July 30-31. It thus stands to reason that if a US-China trade deal materializes at any point in time, there will be a violent repricing of Fed rate cut odds.

In the wake of Mr Powell's comments, the dollar dropped to a five-day low, while the US Treasury yield curve steepened.

The greenback was down 0.15% at 108.320 yen, forced off a six-week high of 108.990 scaled the previous day.

In Asia, Hong Kong's Hang Seng jumped 0.8% to 28,431.80, while the Shanghai Composite index edged 0.1% higher to 2,917.76.

Euro zone government bond yields also fell.

In commodities, USA crude oil futures climbed to a six-week high as oil rigs in the Gulf of Mexico were evacuated before a storm, while an incident with a British tanker in the Middle East highlighted ongoing tensions in the region.

The kiwi was trading at 66.67 United States cents at 5pm in Wellington from 66.41 cents at 8am. Brent crude oil, the global standard, added 24 cents to $67.25 per barrel.

With investors in contracts linked to the Fed's targeted overnight lending rate putting the probability of a rate reduction at close to 100 percent, "it would be unprecedented for the Fed to not cut", Lavorgna wrote.

  • Zachary Reyes