KEY POINTS:
The New Zealand dollar strengthened today mainly in response to a weak US unit, and despite rising expectation the Reserve Bank will ease rates, possibly as early as next week.
Traders were unsure which way to take the kiwi after the June quarter CPI printed at 1.6 per cent, higher than economists' forecasts of 1.4 per cent.
However, despite an annual inflation rate of 4 per cent, economists said inflation pressures outside food and petrol were diminishing due to the sharply slowing economy, and the Reserve Bank should start to ease.
ANZ chief dealer Murray Hindley said it was a 50:50 call whether the bank cut on July 24, or held off until September.
The market's main focus was on US dollar weakness. The greenback fell towards a record low against the euro as traders worried about the financial system despite the US announcement of an emergency plan to support two struggling top mortgage lenders.
Despite further weakness in Asian region sharemarkets, Japanese traders were attempting to pick up yield currencies, such as the kiwi.
The kiwi also piggybacked the strength of the Australian dollar, which closed on a 25-year high of US97.51c, against US96.82c yesterday. The kiwi cross rate closed on A78.54c against A78.64c yesterday.
Minutes of the Reserve Bank of Australia's July meeting showed the central bank remained concerned about inflation, suggesting it will likely keep interest rates at a 12-year high.
ANZ said in its briefing note today it was notable the kiwi continued to attract buying support despite rising risk gauges - rising volatility and widening emerging market bond spreads.
"Normally, when these risk gauges rise, the carry trade gets pared back which sees the New Zealand dollar head lower."
But concern about the US dollar over-rode those factors.
The trade weighted index closed firmer to 67.64 from 67.45 yesterday.
Traders said US government support for financial institutions only underscored how severe the credit market problems were, and with the shaky housing market raising worries about the financial system and rising oil prices hurting growth, there was little incentive to buy dollars.
The US Treasury and Federal Reserve launched emergency measures to restore investor confidence in embattled US mortgage lenders Fannie Mae and Freddie Mac.
"It's difficult to actively buy the dollar just because of government support measures, because there are other factors weighing on the dollar, such as worries over the health of financial institutions and rising oil prices," said Hiroshi Yoshida, a trader at Shinkin Central Bank.
Reuters currency rates:
4.30pm today 5pm yesterday
NZ dlr/US dlr US76.58c US76.12c
NZ dlr/Aust dlr A78.54c A78.64c
NZ dlr/euro 0.4805 0.4789
NZ dlr/yen 81.07 81.05
NZ dlr/stg 38.33p 38.33p
NZ TWI 67.64 67.45
Australian dollar US97.51c US96.82c
Euro/US dollar 1.5938 1.5902
US dollar/yen 105.84 106.44
- NZPA
