The New Zealand dollar is heading for a 5.4 per cent decline against the greenback this year, with US interest rates the main focus for 2018.
The kiwi traded at 67.05 US cents at 1pm in Wellington, largely unchanged from Friday, and down from 70.86 cents at the start of the year. The trade-weighted index was at 73.28 from 73.37 last week, and is heading for a more muted 1.2 per cent annual decline from 74.15.
The greenback spent much of 2018 on the rise as robust economic growth at the start of the year supported what was seen as an increasingly aggressive rate-hiking programme at the US Federal Reserve under new chair Jerome Powell. The Fed ended up raising the federal funds rate four times this year, finishing 2018 in a 2.25-to-2.5 per cent band. However, growing fears about the potential impact of an all-out trade war between China and the US saw investors rein in their expectations for rate hikes next year, removing some of the greenback's tailwind.
"We had four hikes this year, but hikes in 2019 and beyond have been pared back significantly as time has gone on," said Mike Shirley, an FX and interest rate sales dealer at Kiwibank. "The kiwi drifted lower for most of the year then started to recover."
While the Fed was raising interest rates, most other central banks around the world remained on hold, including New Zealand's Reserve Bank. Governor Adrian Orr spent much of the year talking down the kiwi by talking up the chance of an interest rate cut from what was already a record low 1.75 per cent in the official cash rate.
Stuart Ive, a foreign exchange dealer at OMF, said that emphasis was a negative for the kiwi, although he speculated the Reserve Bank would probably want the local currency a little bit lower.
The divergent interest rate outlook lifted US bond yields above their New Zealand equivalent, with US 10-year Treasury yields ending the year 33 basis points higher than New Zealand 10-year government bond yields, having started the year 34 basis points below.
New Zealand's two-year swap rate fell 1 basis point to 1.96 per cent today, and is down from 2.2 per cent at the start of the year. Meanwhile, 10-year swaps fell 3 basis points to 2.64 per cent, and have dropped from 3.13 per cent this year.
Kiwibank's Shirley said despite the reversal of the interest rate differential, New Zealand remains an attractive investment proposition with a stable government and low government debt relative to GDP.
"From a global perspective, New Zealand is looking like an increasingly safe pair of hands," he said.
That stability is attractive with increasingly volatile financial markets. Wall Street whipped around last week in holiday-shortened trading, and geopolitical uncertainty continues to unnerve investors. That includes the current US federal government shutdown, divisions in the White House over US President Donald Trump's decision to withdraw from Syria, the ongoing trade dispute between the US and China, and managing Brexit, to name a few.
That's boosted demand for the Japanese yen, which is typically a haven for investors during periods of unease. The kiwi fell to 73.97 yen from 79.82 yen at the start of the year.
A number of those issues will be coming to a head in the coming weeks, with US and Chinese officials meeting next week on trade issues, although March will be a key period, encompassing Britain's formal exit from the European Union and also the end of the 90-day road-map for the US and China to reach a compromise on trade.
OMF's Ive said that opaque outlook and heightened volatility has made traders more cautious and that sentiment will remain until there's more clarity on where the global economy is heading.
The China-US trade dispute has weighed more heavily on the Australian dollar, and the kiwi has climbed to 95.20 Australian cents from 90.81 cents at the start of the year. It decreased to 4.6086 Chinese yuan from 4.6104 yuan and slipped to 58.61 euro cents from 59.04 cents at the start of the year.
The kiwi rose to 52.84 British pence from 52.42 pence at the start of the year as the threat of a disorderly Brexit weighed on Britain's currency.