Dollar rises to 7-week high vs euro as ECB seen easing monetary policy in June

The New Zealand dollar rose to its highest in almost seven weeks against the euro on speculation the European Central Bank will ease monetary policy at its meeting next month.

The kiwi touched 63.17 euro cents early this morning, its highest level since March 28, and was trading at 62.98 cents at 8am in Wellington, from 62.72 cents at the 5pm market close yesterday. The local currency was unchanged at 86.30 US cents.

The euro was the worst performing major currency overnight after the ZEW German investor confidence gauge declined for a fifth consecutive month in May to its lowest level since January last year. Adding to declines in the euro, Dow Jones reported that the hawkish German central bank is now willing to back an array of stimulus measures by the European Central Bank next month if needed to fight low inflation.

"For years the Bundesbank has been the most trenchant opponent to extraordinary monetary policy measures," Raiko Shareef, currency strategist at Bank of New Zealand, said in a note. "This reported shift in its mindset lends ECB president (Mario) Draghi considerable support if he decides to cut interest rates in June, or even engage in quantitative easing."

Draghi kept the ECB's interest rate at a record low last month but signalled the bank was ready to act at its next meeting, pending the latest inflation predictions. When inflation is too low, debt becomes harder to services and consumers may put off purchases in the hope that prices will fall.

The Bundesbank is willing to support a negative interest rate on bank deposits, long-term loans to banks at capped interest rates and ECB purchases of packaged bank loans if needed to boost inflation, Dow Jones reported on its Wall Street Journal site, citing a person familiar with the matter that it didn't name.

In New Zealand today, traders are awaiting the Reserve Bank's latest six-monthly Financial Stability Report, scheduled for release at 9am, which will be followed by a press conference. Governor Graeme Wheeler will also appear before the government finance select committee at midday to discuss the report.

First quarter retail sales data is released at 10:45am while the level of non-resident bond holdings will be published at 3pm.

The New Zealand dollar was little changed at 92.23 Australian cents from 92.22 cents yesterday following the Australian federal budget and weaker than expected Chinese data on industrial production, retail sales, home sales and investment.

The kiwi advanced to 51.29 British pence from 51.12 pence yesterday ahead of the Bank of England's quarterly inflation report tonight where the central bank updates its forecasts.

The local currency edged up to 88.27 yen from 88.24 yen yesterday while the trade-weighted index gained to 80.32 from 80.21.

(BusinessDesk)