The New Zealand dollar yo-yoed between US43.30c and US43.60c yesterday as investors digested a surprise interest rate hike.
Reserve Bank Governor Don Brash yesterday morning lifted the Official Cash Rate, the benchmark for mortgage and business lending rates, from 4.75 per cent to 5.0 per cent.
Dr Brash said the economy was running stronger than expected and he was withdrawing some "insurance" he took out in the wake of the September 11 attacks when he cut interest rates by over one percentage point.
Most economists had expected Dr Brash hold off from raising interest rates until next month or May.
The kiwi slipped to US43.30c immediately after the announcement, but recovered to end the session at US43.58c, just above Tuesday night's close of US43.55c. Its Australian stablemate rose to US52.78c from US52.40c on Tuesday.
Deutsche Bank currency dealer Tim Robinson said the market was divided on today's decision.
"There's a real polarisation of views at the moment.
"On one side of the fence you've got people saying that Dr Brash did the right thing, that the economy really is pumping along - we've got positive migration flows, the housing market is really booming along and commodity prices are picking up and inflation is in the pipeline.
"On the other side of the fence you've got the people who are saying if the highest growth (Dr Brash) sees down the track is 2.75 per cent, which is the growth track the RB put out, and he sees them easing - after a tightening patch - by the end of next year, then they just don't want to know about (yesterday's rise). They think New Zealand is a place to avoid like the plague," Mr Robinson said.
Just hours before the RB's statement, the United States Federal Reserve left interest rates unchanged at a 40-year low of 1.75 per cent in a widely-expected move.
Saying the US economy was now expanding at a "significant pace," Federal chairman Alan Greenspan laid the groundwork for rate rises later this year by dropping its 15-month-old warning about recession risks.
Sweden's Riksbank narrowly pipped the RB to be the first of the central banks to raise, hiking its key rate by 25 basis points to 4.0 per cent overnight.
Dealers expected the kiwi to trade between US43c and US43.65c offshore overnight.
On the crosses at 5pm the kiwi eased against the aussie to A82.58c (A83.09 at Tuesday's close), but rallied against the other main currencies to 57.63 yen (57.12), 30.63 pence (30.51), 0.7237 Swiss francs (0.7226), and 0.4942 euro (0.4930).
The aussie was at $NZ1.2118 ($NZ1.2031).
The trade-weighted index was at 52.64 (52.57), the monetary conditions index tightened to minus 557 (minus 580), and 90-day bank bills were at 5.49 per cent (5.32).
On the debt market the April 2004 bonds bumped up to 6.27 per cent from 6.08 at yesterday's close, the November 2006s were at 6.77 per cent (6.69), and the November 2011s were at 6.91 per cent (6.89).
- NZPA
<i>Currency:</i> Kiwi rallies despite surprise rate rise
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