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Dollar touches two-week high ahead of expected interest rate hike

The New Zealand dollar rose to its highest in more than two weeks ahead of an expected hike in interest rates by the Reserve Bank today.

The kiwi touched 85.74 US cents overnight, and was trading at 85.53 cents at 8am in Wellington, from 85.48 cents at 5pm yesterday. The trade-weighted index was unchanged at 79.79.

Reserve Bank governor Graeme Wheeler is expected to lift the official cash rate a quarter point to 3.25 percent this morning, although opinion is divided on whether he will affirm his previous expectation from March for 200 basis points of tightening over two years or signal a slower track. Traders will be focused on the bank's 90-day bank bill track, a proxy for the OCR, to gauge whether Wheeler will slow the pace of interest rate rises.

"A 25 basis points OCR hike from the RBNZ today should not surprise many as it is almost fully priced by the market," Kymberly Martin, senior market strategist at Bank of New Zealand, said in a note. "The focus will be on accompanying commentary (especially relating to the NZD) and the published 90-day bank bill track.

"The market now prices not much more than 125bps of OCR hikes in the coming two years," Martin said. "The RBNZ's previously published March MPS 90-day bank bill track implied 200bps of hikes by this time. Even if the RBNZ were to slightly tweak its 90-day track to build in a little near-term flexibility, it will likely still be notably more hawkish than current market pricing."

The kiwi may respond in a knee-jerk reaction higher should the central bank reiterate its path of interest rate rises, Martin said.

The monetary policy statement will be released at 9am and include updated forecasts and a press conference. Governor Wheeler will appear before parliament's finance and expenditure committee at midday.

The local currency has support at 85.20 US cents with initial resistance at 85.90 cents, she said.

Tonight, traders will be eyeing a report on US retail sales for May.

The New Zealand dollar edged up to 91.12 Australian cents from 91.08 cents yesterday ahead of a report on Australian employment scheduled for release at 1:30pm New Zealand time.

The kiwi touched a four-week high of 63.34 euro cents overnight and was trading at 63.22 cents at 8am from 63.18 cents yesterday ahead of a report on Eurozone industrial production. The local currency slipped to 50.94 British pence from 51.03 pence yesterday after a report showed UK unemployment fell to its lowest in more than five years.

The New Zealand dollar weakened to 87.26 yen from 87.44 yen yesterday on speculation the Bank of Japan will refrain from expanding stimulus at its meeting tomorrow.

(BusinessDesk)

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