KEY POINTS:
The New Zealand dollar was staring at US80c at the close of business today.
Yesterday, it touched a seven-month high around US80.22c and some dealers said US85c was now a distinct prospect as the US dollar continues to weaken.
It ended today's session on US79.99c, compared with US79.59c yesterday.
A recovery in Tokyo's shares after a rise on Wall Street overnight helped demand for carry trades, buoying higher-yielding currencies like the kiwi against the yen. The Nikkei average was up 2 per cent as the local currency market closed.
In carry trades, investors borrow funds in low-yielding Japanese currency to buy higher-yielding currencies and assets.
The kiwi gained on all its cross rates and the New Zealand dollar trade weighted index closed on 73.35 against 72.99 yesterday.
Against the Australian dollar, the kiwi rose to A87c from A86.82c.
The US dollar weakened again, stung by expectations the Federal Reserve will keep slashing interest rates to prevent the US economy from suffering a sharper downturn.
In its quarterly forecast, the Fed cut its economic growth forecast for 2008 due to the deepening housing slump and tight credit, saying the risks of further setbacks were worrisome.
Analysts believe the Fed is bracing for the possibility of further deterioration in the economy and is prepared to cut short-term rates even further after slashing them by a total of 125 basis points to 3.0 per cent last month.
That compares with New Zealand's official cash rate of 8.25 per cent.
Market players see the Fed cutting rates by 50 basis points at its next meeting in March, which would further erode the dollar's yield appeal and enhance the kiwi.
"Money and funds still need to flow somewhere, and New Zealand is still going to offer an attractive yield differential, particularly from the United States," said Joshua Williamson, senior strategist at TD Securities in Sydney.
"At the end of the day, it's interest rates that are keeping the kiwi relatively elevated."
- NZPA
