Dollar gains from three-month low as traders regain confidence in local economy

The New Zealand dollar climbed from a three-month low as traders recovered lost confidence in the local economy, and lowered their expectations for a downgrade to the Reserve Bank's interest rate track when it reviews monetary policy next week.

The kiwi rose to,84.41 US cents at 5pm in Wellington from 84.15 cents at 8am and 84.13 cents yesterday.

The trade-weighted index advanced to 78.90 from78.67 yesterday.

The New Zealand dollar arrested its slide this month as traders pared back expectations Reserve Bank governor Graeme Wheeler will lower his forecast track for interest rate hikes this year at next Thursday's monetary policy review.

Traders started anticipating a slower pace of interest rate increases as dairy prices steadily declined this year, and local inflation stayed in check.

Traders are betting Wheeler will hike the official cash rate 80 basis points over the coming 12 months, according to the Overnight Index Swap curve.

"The market is coming to their senses and realised they have overdone how much they think the Reserve Bank will downgrade the interest rate track next week," said Imre Speizer, market strategist at Westpac Banking Corp in Auckland. "There was a very large gap that opened up between the Reserve Bank's latest forecast from March and where the market has priced it."

Investors will be watching the European Central Bank policy meeting on Thursday in Brussels, where president Mario Draghi is expected to announce new measures to stimulate the European economy.

The kiwi gained to 62.04 euro cents at 5pm from 61.79 cents yesterday.

Westpac's Speizer said if Draghi delivers more stimulus, that should push interest rates lower and weigh on the kiwi dollar, which is seen as attractive because of New Zealand's relatively high rates, and if Draghi doesn't announce new measures, that will probably support the local currency. 

The Bank of England also reviews monetary policy on Thursday in London, and is expected to keep rates unchanged. The kiwi edged up to 50.40 British pence from 50.29 pence yesterday.

Traders will be watching US employment figures on Friday in Washington for an update on the strength of the world's biggest economy after a private payrolls report missed expectations.

The kiwi increased to 90.90 Australian cents at 5pm in Wellington from 90.73 cents yesterday, and advanced to 86.56 yen from 86.35 yen.

(BusinessDesk)