New Zealand dollar sags, eyes on Fed's Yellen

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LONDON (Feb 24): The New Zealand dollar was the biggest mover on major currency markets on Monday, diving more than one percent against its U.S. counterpart after a drop in inflation expectations.

The yen inched lower against the dollar and the euro was steady as investors awaited the next stage in talks over a temporary funding deal for Greece and testimony from Federal Reserve chief Janet Yellen.

Months of dollar strength based on expectations that the Fed will raise interest rates in the middle of this year, allied to falling oil and commodity prices, have hammered the Australian, New Zealand and Canadian dollars.

The central bank inflation survey added to concerns that New Zealand's economy will struggle to build on a hitherto healthy performance in the face of lower global demand in the year ahead.

"The fall in inflation expectations knocked us back this morning," said a dealer with one international bank in London.

"It's the same picture we have seen on the kiwi and the Aussie over the past month. There is no chance of them raising interest rates again this year, and we may yet see a turnaround towards cutting them."

By 0834 GMT, the New Zealand dollar was down 1 percent on the day to $0.7450. The Australian dollar lost 0.6 percent against the U.S. dollar, and Canada's lost 0.4 percent .

Yellen's appearance before the U.S. Senate Banking Committee is drawing extra attention after dovish-sounding minutes from the Fed's January meeting released last week dented expectations of an early interest rate hike.

Analysts are divided on what note she will sound, although few think she is ready to take the sort of clear step toward a first hike that would spur another round of dollar gains.

"We expect the Fed to cement expectations for a hike in the third quarter and I don't think Yellen will want to push markets to veer significantly off course today," said Stephen Gallo, European Head of FX strategy at Bank of Montreal in London.

"That leaves us with a continuation of the picture where you would be looking to buy the dollar on the dips."

The dollar gained 0.4 percent to 119.34 yen. Against the euro, it was less than 0.1 percent stronger at $1.1325.

Greece sent a list of reform plans to European institutions around midnight that was "a valid starting point" for further discussions of its bailout, a source close to the European Commission told Reuters.

European finance ministers are expected to respond to the plan later on Tuesday.