KEY POINTS:
The New Zealand dollar reached a 23-month high yesterday, piggybacking on its Australian counterpart and benefiting from broad US dollar selloff.
The kiwi hit US72.56c in early afternoon trade, its highest level since May 2005, before closing at US72.45c.
The aussie rose almost two-thirds of a cent to a 17-year high of US82.32c.
The aussie's rise is being driven by expectations that interest rates will increase in Australia next month, fuelling related "carry trade" activity, in which investors borrow in low interest rate-bearing currencies, such as Japanese yen, to buy higher yielding currencies such as Australian and New Zealand dollars.
Earl White of Bancorp Treasury services said the kiwi dollar was essentially along for the ride as the aussie made ground.
"It seems people are happy with an A88c kiwi-aussie cross and that means if the aussie goes up we get dragged along."
As well as the prospects of a further Reserve Bank of Australia rate increase, White said, the aussie was also gaining support from sharemarket activity.
The Australian market reached new highs yesterday, much of its buoyancy prompted by takeover activity including Mexican company Cemex's US$14.25 billion bid for construction materials firm Rinker and takeover activity for retailer Coles Group.
Meanwhile, chances of another New Zealand interest rate increase appeared to be boosted by the New Zealand Institute of Economic Research's quarterly survey of business opinion, in which headline confidence was down but pressure was up on prices and capacity.
But ANZ dealer Mark Elliott downplayed the importance of domestic factors on yesterday's trade, saying the kiwi dollar's moves and those of the aussie were ultimately related to a broad-based US dollar sell-off.
Westpac currency strategist Michael Gordon said it was unclear if the Australasian currencies' gains were being driven by domestic factors or the US dollar sell-off.
Gordon and Elliott both said it was not clear what was driving the US dollar down, days after better than expected jobs figures sent it up.
BNZ currency strategist Danica Hampton warned traders not to get carried away with the kiwi's strength.
She said the US dollar looked primed to stage a recovery as the speculative market was extremely short of dollars.
She suspected the market would become increasingly nervous about carry trades before Friday's G7 meeting of finance officials.
"Increasing nervousness towards carry trades will likely encourage short-term speculative players to trim back long NZ dollar-Japanese yen positions, and NZD/JPY supply should also help cap the gains in the NZD/USD," she said.
- additional reporting NZPA
Up, up and away ...
* The New Zealand dollar hit US72.56c yesterday, its highest since May 2005.
* Dealers say it was riding the Australian dollar's coat-tails.
* The aussie hit a 17-year high of US82.32c yesterday, pushed up by prospects of further Reserve Bank of Australia rate increases and booming merger and acquisition activity.