US Dollar Hits Two-Week High; New Zealand Dollar Plummets Over 1% on Dovish RBNZ

The U.S. dollar extended its rally to a near two-week high on Wednesday, pressuring major currencies across the board as rising Treasury yields and hawkish central bank commentary bolstered its appeal. The New Zealand dollar suffered its steepest daily decline since March after the Reserve Bank of New Zealand (RBNZ) delivered an unexpectedly dovish policy update, while the euro touched a multi-week low.

Dollar Strength Driven by Yields and Fed Outlook

The U.S. Dollar Index, which measures the greenback against a basket of six major currencies, climbed to 99.74. The move was supported by benchmark U.S. Treasury yields rising to multi-year highs following hawkish remarks from Federal Reserve officials, including Kevin Warsh at the recent Jackson Hole symposium.

Foreign exchange markets largely shrugged off weaker-than-expected U.S. economic data, including a dip in the August ISM Manufacturing Index and softer July JOLTS job openings. According to Investing.com, money markets continue to price in a roughly 68% probability of the Federal Reserve implementing a 25-basis-point interest rate hike at its September 16 meeting.

Kiwi Tumbles on RBNZ Policy Shift

The New Zealand dollar was the worst-performing G10 currency, falling more than 1% against the dollar to a low of $0.5843, its weakest level since late July. The sharp sell-off was triggered by the RBNZ's latest monetary policy decision.

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While the central bank raised its policy rate by 25 basis points as expected, its forward guidance was surprisingly cautious. RBNZ officials used vague language regarding the future path of interest rates, suggesting that another hike in October was not guaranteed and that policy would remain data-dependent. In response, traders unwound bets on continued aggressive tightening, pushing down wholesale interest rates and eroding the kiwi's yield advantage.

Other Major Currencies Under Pressure

Across the foreign exchange landscape, other major currencies also ceded ground to the dollar amid shifting central bank expectations and rising global bond yields.

• Euro (EUR): The single currency fell 0.2% to a near two-week low of $1.1576. While headline inflation in the Eurozone accelerated to 3.3% in August, a slowdown in core CPI to 2.4% has tempered expectations for a hawkish European Central Bank ahead of its September 10 meeting.
• Japanese Yen (JPY): The yen hovered near 160.21 per dollar, struggling for traction despite Bank of Japan officials confirming they will discuss a rate hike at their September 17-18 policy meeting. The widening interest rate differential, with the 10-year U.S. Treasury yield approaching 4.81%, continues to weigh heavily on the yen.
• Australian Dollar (AUD): The risk-sensitive Aussie dollar slipped 0.2% to $0.7140, an over one-week low. The currency failed to find support from positive Q2 GDP data and a surge in Australian 10-year bond yields to their highest since 2011.
• Canadian Dollar (CAD): The loonie was a modest outlier, strengthening 0.2% ahead of the Bank of Canada's policy announcement later Wednesday. The currency found support from crude oil prices holding above $91 per barrel.