KEY POINTS:
The New Zealand dollar powered to its highest level since early July after terms of trade data came out both strong and stronger than expected.
The kiwi closed on US78.35c, virtually a cent higher than the same time yesterday.
It gained on all the major cross rates, rising to A88.85c against the aussie from A88.38c and 87.58 Japanese yen from 86.38.
Soaring world dairy prices pushed New Zealand's terms of trade index up 3.6 per cent to a 33-year high in the September quarter. Economists had forecast a 3 per cent rise.
A 3.3 per cent rise in merchandise export prices in the September quarter was largely driven by a 16.9 per cent rise in dairy products. Meanwhile import prices fell 0.3 per cent thanks to the strength of the dollar.
Against that backdrop, the US dollar reversed recent strong gains ahead of a widely expected Federal Reserve interest rate cut tomorrow.
Analysts are fully pricing in a quarter percentage-point easing in the Fed's benchmark rate to 4.25 per cent when the central bank meets. But perceived chances of a bigger move have fallen to one-in-five from around 50-50 a week ago.
ANZ bank said there was solid demand for the NZ dollar from offshore.
With risk appetites slowly returning, it was becoming all about yield once again, ANZ said.
"The market is beginning to realise that there are investors with money who are willing to take risks, so players are not responding as negatively as before to news of subprime-related losses. I think the market focus is returning to risk appetite," a Japanese trading house senior dealer said.
ANZ said the Reserve Bank's last week comments that interest rates would remain higher for longer, along with liquidity beginning to dry up leading into the holiday period, should ensure any dips were well supported.
Traders said the dollar was likely to hold steady before the Fed decision, as the recovery in risk appetite was likely to benefit high-yielding currencies such as the kiwi, euro, Australian dollar and sterling at the expense of the low-yielding yen.
"Yen crosses are firm as excessive pessimism about the US economy and subprime mortgage woes seem to be easing and boosting risk appetite, which in return is keeping the dollar steady," the senior Japanese trading house dealer said.
Reuters currency rates:
5pm today 5pm yesterday
NZ dlr/US dlr US78.35c US77.42c
NZ dlr/Aust dlr A88.85c A88.38c
NZ dlr/euro 0.5320 0.5287
NZ dlr/yen 87.58 86.38
NZ dlr/stg 38.28p 38.11p
NZ TWI 72.39 71.86
Australian dollar US88.86c US87.60c
Euro/US dollar 1.4724 1.4645
US dollar/yen 111.69 111.56
- NZPA