KEY POINTS:
The New Zealand dollar jumped more than one US cent today after the Government delivered a budget that was far more stimulatory than anticipated.
Economists and traders assessed the Reserve Bank would now have to delay interest rate cuts and when they come, late in the year, they will be less than previously expected.
Trading in the currency market was frenetic. The market shorted the kiwi in anticipation of a ho-hum budget and traders had to frantically buy back positions, an Auckland dealer said.
He predicted more hectic action during the London session and expected the kiwi to head back toward US80c.
Wholesale money markets had before today factored in 40 basis points of official rate cuts by September but today that had been slashed back to 12 basis points by October.
Traders said they were amazed at Finance Minister Michael Cullen's flip-flop, where he assessed he could give $10.6 billion of tax cuts over four years despite running cash deficits of over $3 billion. Previously, despite running large surpluses, he said tax cuts were not affordable.
"I'd like to think someone will do the analysis. Something doesn't add up," the Auckland dealer said.
"It's going to be very hard for the Reserve Bank to cut interest rates. Efffectively rates are going to be up for longer."
From US77.47c at 5pm yesterday, the kiwi climbed to US78.61c, by the close.
It rose against all currencies and the trade-weighted index jumpted to 69.58 from 68.75.
Even against the Australian dollar it jumped to A81.65c from A80.79c.
In the major currency trading, the euro pushed to a one-month high against the US dollar after the Federal Reserve cut its 2008 growth forecast, while crude oil's surge to fresh record highs stirred fears about inflation and a deeper US slowdown.
Oil jumped to a record high of US$135.04 in early trade, extending big gains from the previous day and fuelling worries that the US economy is sliding into stagflation - a vicious combination of rising inflation and tepid growth.
The dollar has taken a hit not only because it tends to fall when oil rises, but also because the US is facing such a toxic mix of growth and price pressures at a time when the Fed has slashed interest rates to buttress the economy.
By contrast, upbeat German business sentiment data stoked expectations that the European Central Bank is more likely to lift interest rates in the months ahead after having kept them steady at 4 per cent for nearly a year.
CROSS RATES
NZ dlr/US dlr US78.61c
NZ dlr/Aust dlr A81.65c
NZ dlr/euro 0.4985
NZ dlr/yen 81.05
NZ dlr/stg 39.87p
NZ TWI 69.58
Australian dollar US96.26c
Euro/US dollar 1.5761
US dollar/yen 103.13
- NZPA