Dollar Firms for a Third Session; Kiwi Slumps on Dovish RBNZ

Introduction

The U.S. dollar extended its winning streak for the third consecutive session on Wednesday, supported by cautious positioning ahead of the Federal Reserve’s Jackson Hole symposium. Despite mounting expectations of a rate cut in September, traders appeared risk-averse, favoring the greenback over growth-sensitive currencies.

Meanwhile, the New Zealand dollar (NZD) fell sharply following a dovish surprise from the Reserve Bank of New Zealand (RBNZ), which not only cut its benchmark rate by 25 basis points but also hinted it had considered a deeper reduction. The central bank’s lower projected rate floor signaled further downside potential, pushing the kiwi lower.

What Happened

Dollar Strength: The U.S. dollar continued to climb against major peers like the euro and British pound, as markets positioned defensively ahead of Fed Chair Jerome Powell’s speech at Jackson Hole.
Rate Cut Expectations: Although the odds of a Fed rate cut in September have risen due to softer inflation prints, the dollar remained resilient. Traders appear to be betting that the Fed will remain cautious and signal a slow pace of easing.
Kiwi Tumbles: The RBNZ cut rates by 25 bps as widely expected, but the surprise came from its forward guidance. The central bank revealed it had considered a larger cut and revised its rate path lower, signaling a more accommodative stance going forward.

Market Take

Market analysts described the dollar rally as another example of the “good news is bad news” paradox — where mixed U.S. economic data and global uncertainty drive investors toward the safety of the greenback. Despite expectations of a Fed rate cut, the lack of clear forward guidance and elevated event risk has capped risk appetite.

The Australian dollar (AUD) and New Zealand dollar (NZD), which are both highly sensitive to global risk sentiment and Chinese economic trends, remained under pressure. The kiwi was particularly hit hard after the RBNZ signaled the door remains open to further easing.

Key Factors at Play

Jackson Hole Uncertainty: The Fed’s annual symposium in Jackson Hole is a key risk event. Any suggestion by Powell of a “higher-for-longer” stance could reinforce dollar strength.
RBNZ’s Dovish Tilt: The New Zealand central bank’s move and guidance marked a significant policy shift. It lowered the bottom of its forecast range, implying lower rates for longer — a clear negative for the NZD.
FX Volatility Rises: With rising policy divergence and anticipation around central bank communication, FX volatility has spiked. Traders are paying up for options around Jackson Hole, reflecting elevated uncertainty.

Implications for Markets

U.S. Dollar Outlook: Short-term strength could persist if Powell delivers a cautiously hawkish message. The bar remains high for aggressive easing, especially with U.S. labor markets still relatively firm.
NZD and AUD Sensitivity: Both currencies may remain vulnerable to global risk-off moves and weak Chinese data. The NZD may face extended downside if RBNZ maintains its dovish posture into year-end.
Risk Sentiment: Broader risk appetite may stay muted into Jackson Hole, with investors hesitant to take aggressive positions ahead of potential central bank surprises.

Conclusion

The U.S. dollar’s three-day rally reflects growing investor caution ahead of the pivotal Jackson Hole meeting, while the New Zealand dollar’s sharp decline highlights the impact of dovish central bank surprises. With the Fed and RBNZ moving in seemingly opposite directions, FX markets are bracing for volatility. All eyes now turn to Jerome Powell, whose tone at Jackson Hole may determine whether dollar strength extends — or reverses.