Dollar holds near two-month high ahead of inflation data

The New Zealand dollar held near a two-month high ahead of consumer prices data expected to show the pace of inflation has returned to the Reserve Bank's target band adding to the case for interest rate hikes this year.

The kiwi traded at 72.47USc at 8am in Wellington from 72.44USc late yesterday. The trade-weighted index was at 79.21 from 79.18, still higher than the average 76.4 level the central bank projected for the first quarter in its November monetary policy statement.

Investors will be watching New Zealand's consumers price index, which economists expect rose 0.2% in the final three months of 2016 for an annual rise of 1.2%, the first time it would be back within the central bank's target band of 1-3 % since the third quarter of 2014.

Tepid inflation, caused in part by the strength of the currency, prompted governor Graeme Wheeler to cut the official cash rate to new record lows last year.

Since then, US President Donald Trump's planned infrastructure spending and a robust US economy have spurred expectations the Federal Reserve will boost rates more aggressively, lifting bond yields around the world and prompting a rethink about New Zealand's interest rate track.

The CPI data will be "highly significant to the market's view on the local policy outlook" with a 50% chance of the RBNZ hiking rates in August, and a full hike priced in by November, Bank of New Zealand economist Doug Steel says.

"Our short-term model still favours NZD/USD higher, boosted by current risk appetite, but NZ CPI data will likely dictate direction today."

The Chicago Board Options Exchange's Volatility Index, known as Wall Street's 'fear gauge', fell to its lowest level in two-and-a-half years as investors' appetite for risk-sensitive assets has been heightened by President Trump's mooted fiscal policies which would further stimulate the world's biggest economy.

Japan's yen, a safe-haven asset that typically benefits when investors are more averse to risk, weakened, and the kiwi rose to 82.46 yen from 82.27 yen yesterday.

The local currency was little changed at 95.95Ac from 96Ac late yesterday after Australian inflation data missed investors' expectations.

The kiwi increased to 4.9875 Chinese yuan from 4.9816 yuan yesterday and traded at 67.55 euro cents from 67.50 cents. It fell to 57.47 British pence from 57.50 pence yesterday.

(BusinessDesk)