NZ dollar gains on prospect of rate increases

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The New Zealand dollar rose against the greenback, as support from investors chasing higher interest rate yields helped the currency sidestep the selloff on global markets.

The kiwi dollar received a boost yesterday on the back of Consumer Price Index data for the second quarter, which showed prices rose 1 per cent in the three months ended June 30, pushing the annual rate to a 21-year high 5.3 per cent.

That saw the market lift its bets on when the Reserve Bank is likely to start raising rates, with 76 basis points of hikes priced in over the next 12-months according to the Overnight Swap Curve index, a gain of 10.1 per cent.

That compares to Australia, where speculation is growing that the Reserve Bank may cut rates over the next year.

"The kiwi was well supported in the session, with interest rate differentials really coming into play," said Mike Burrowes, a currency strategist with Bank of New Zealand.

"Yesterday's higher-than-expected CPI number confirmed that the inflation risks are skewed to the upside and that's seen the market increase their RBA rate hike expectations."

Global markets were again wracked with debt fears, with equities and commodities retreating as European and U.S. officials appeared no closer to resolving their respective crises.

On Wall Street, the Standard & Poor's 500 Index fell 0.8 per cent to 1,305.44, Europe's Stoxx 600 fell 1.8 per cent to 462.10, and the 19-commodity Thompson Reuters Jefferies Index fell 0.7 per cent to 343.81.

The kiwi recently traded at 84.34 US cents, up from 84.29 cents yesterday, and rose to 73.1 on the trade-weighted index of major trading partners' currencies from 73.09.

It rose to 79.58 Australian cents from 79.49 cents yesterday, and climbed to 66.69 yen from 66.55 yen. It fell to 59.80 euro cents from 60.03 cents yesterday, and gained to 52.55 pence from 52.34 pence previously.

Currency markets will be watching for release of the Reserve Bank of Australia's most recent meeting minutes, which is expected today.

Burrowes said markets will be looking for any interest rate hints after Westpac Banking Corporation turned bearish on the Australian economy over the weekend, pricing in 100 basis points of cuts over the next 18-months.

The kiwi may trade between 84.10 US cents and 84.90 cents, Burrowes said, with the bias to the upside.