KEY POINTS:
The New Zealand dollar eased back today after climbing across the board overnight.
From a low of around US66c about 7pm yesterday, the kiwi opened at US66.60c today and ended at US66.50c compared with US66.23 yesterday.
The picture was similar against the Australian currency, with the New Zealand dollar moving to A86.42c from A86.01c.
Against the euro the kiwi was buying 0.5228 euro from 0.5204 at 5pm yesterday, while against the yen it was at 78.13 from 77.73. The trade weighted index was at 66.50 from 66.20.
ANZ Bank today said the kiwi had found support from Asian yield demand and following yesterday's strong dwelling consents data and today's uptick in the National Bank's monthly business confidence outlook.
Demand for the New Zealand dollar on the cross with the Australian currency had been particularly evident during the past 24 hours, ANZ said.
Analysts said yield-hungry investors are likely to favour the Australian dollar over the kiwi in the medium-term as the countries' central banks take diverging paths on interest rates.
New Zealand's 7.25 per cent interest rate is the highest in the industrialised world, but Australia is in second place and coming up fast with rates widely expected to rise to a near six-year high of 6.25 per cent next week.
"When you look at the growth profile and the interest rate story, Australia may look relatively more attractive," said Danica Hampton, currency strategist at Bank of New Zealand.
But while the Reserve Bank of New Zealand (RBNZ) has held rates steady so far this year, the Reserve Bank of Australia (RBA) has tightened twice and is considered highly likely to raise rates again at its monthly policy meeting on Nov. 7.
The futures market is also pricing in a chance of a further move to 6.5 per cent next year given underlying inflation is already at the top of the RBA's target range while the economy, and notably employment, shows considerable resilience.
In contrast, New Zealand's central bank kept rates on hold at its policy meeting last week, despite a slim majority of analysts expecting a rise, causing a sharp fall in yields and a swift sell-off in the kiwi dollar.
Reflecting the market's expectations for a narrowing in interest rate differentials, the Australian and New Zealand two-year swap spread contracted to 83 basis points following the New Zealand central bank's announcement, from 105 basis points.
The Aussie shot up to a six-week high of $1.1662 and Bank of New Zealand's Ms Hampton said she expected the currency to continue rising to around $1.18 by March and to NZ$1.30 by the end of 2007.
"A lot of this is driven by kiwi dollar weakness," she said.
In major markets, the US dollar recovered after data showing solid personal income and spending suggested the Federal Reserve will keep interest rates steady at 5.25 per cent for a while, even as markets still look for the Fed's next move to be a cut in 2007.
The euro dipped to US$1.2710 from US$1.2725 and the yen slipped further from a one-month high against the dollar after weak economic data in Japan cast some doubt on whether the Bank of Japan would be able to raise interest rates again this year.
The following are Reuters currency rates:
5pm Tuesday 5pm Monday
NZ dlr/US dlr US66.50c US66.23c
NZ dlr/Aust dlr A86.42c A86.01c
NZ dlr/euro 0.5228 0.5204
NZ dlr/yen 78.13 77.73
NZ dlr/stg 34.98p 34.91p
NZ TWI 66.50 66.20
Australian dollar US76.90c US77.02c
Euro/US dollar 1.2717 1.2728
US dollar/yen 117.52 117.38
- NZPA