Dollar holds near five-week high on lure of higher rates

The New Zealand dollar held near a five-week high after the Reserve Bank's affirmation that it intends to keep raising interest rates briskly, making the kiwi a standout in a world where major central banks have rates near zero.

The kiwi traded at 86.67 US cents at 5pm in Wellington, having reached as high as 86.99 cents, from 86.82 cents at 8 am. The trade weighted index weakened to 80.68 from 80.83 this morning.

Reserve Bank governor Graeme Wheeler hiked rates a further 25 basis points to 3.25 percent yesterday in a bid to keep a lid on inflationary pressures. The governor affirmed the pace and rate for future hikes, surprising some in the market who thought Wheeler might soften the tightening cycle in the face of lower milk prices weakening economic growth.

"Its been a bit of a consolidating day after fun and games with the RBNZ. The kiwi will remain elevated because of our interest rate track and our expectations of further rate rises," said Stuart Ive, senior adviser at OMF. "Obviously there will be bumps along the way, against the US in particular we will begin to struggle as we see the US economy start to gain a bit of momentum."

New Zealand is one of the few major central banks to shift to a tightening cycle. Across the Tasman the Reserve Bank of Australia has ruled out any changes to its record-low cash rate this year, while Bank of England governor said rising UK mortgage debt may see interest rates rise sooner than the market expects.

The kiwi slipped to 91.98 Australian cents from 92.14 cents this morning, and 92.22 yesterday at 5pm. The currency weakened to 51.08 British pence, from 51.57 pence at 8am and 51.49 yesterday.

It drifted to 88.31 yen from 88.28 yen and 88.29 yen yesterday ahead of the Bank of Japan's meeting this evening where no further change to policy is expected.

The kiwi gave up part of its gains against the European currency, weakening to 63.91 euro cents from 64.01 cents this morning, and a 13-month high of 64.23 euro cents overnight.

(BusinessDesk)