United States Federal Reserve chairman Ben Bernanke has indicated the central bank is likely to slow its bond-buying programme later this year and end it next year because the economy is strengthening.
The New Zealand dollar traded sharply lower yesterday, in response to an upsurge in the US dollar and then to data showing New Zealand's economic growth was surprisingly weak over the first quarter.
The dollar started the day at US80.5c but slipped to US78.54c.
The Australian currency fell by almost US2c to below US93c for the first time since September 2010. That caused the New Zealand dollar to rise to nearly A85c, the highest level against its transtasman neighbour's currency for around five years.
Australian bond future contract prices were weaker after Mr Bernanke's statement and after Asian markets fell on the news.
Forsyth Barr broker Peter Young said the Federal Reserve would continue buying $US85 billion ($NZ108 billion) a month in mortgage-backed and government bonds.
The Federal Reserve's official interest rates remained unchanged at zero to 0.25%.
''The US inflation outlook remains very weak and although the Fed believes this weakness is transitory, they don't forecast inflation rising to their target of 2.5% at any stage in the next two to three years.''
US inflation was 1.1%, Mr Young said.
The market had more or less priced in the outcome to the Federal Reserve's two-day meeting this week. Bond yields were sold off further on the more upbeat economic outlook.
Future risk was now in bond yields having already pushed long dated mortgage rates higher, resulting in an immediate reduction in refinancing activity.
''The more optimistic GDP outlook relies on the housing market continuing to recover. Should that stumble again on higher rates, it's likely the forecast growth rates will be compromised,'' Mr Young said.
The Bank of Japan and the European Central Bank are still in aggressive stimulus mode and retiring Bank of England governor Merv King warned yesterday Britain's economic recovery was not yet secure and more needed to be done to ensure the country's banks no longer posed a threat to taxpayers.
''There is a powerful case for more stimulus in the short term,'' Mr King said.
''A recovery in the UK, albeit modest, is under way . . . but growth is not yet strong enough to reduce the considerable margin of spare capacity in the economy. Nor is recovery at an adequate rate fully assured.''
Mr Bernanke said in his statement the reduction in the Federal Reserve's bond-buying programme would occur in ''measured steps'' and bond purchases could end by the middle of next year. By then, unemployment was expected to be around 7%.
The ultra-low borrowing rates the Federal Reserve engineered had been credited with helping fuel a housing comeback, support economic growth, drive stocks to record highs and restore wealth America lost to the recession.
Anticipating higher interest rates, investors reacted by selling both stocks and bonds.
