The New Zealand dollar retreated from a new five-month high after reports Italy has fallen into recession helped offset optimism that the euro zone is nearing a solution to Greece's sovereign debt crisis.
The New Zealand dollar rose as high as 84.07 US cents, the highest since early September, from 83.52 cents yesterday at 5pm. It recently traded at 83.53 cents.
Italy's economy shrank in the fourth quarter of last year, probably more steeply than the 0.2 per cent decline in gross domestic product in the third quarter, according to Reuters, which cited unnamed government officials.
If the data is confirmed by the national statistics office on February 15, it will mean Italy is officially in recession, which is widely expected to continue for the rest of the year. The kiwi dollar had gained earlier on hopes of progress from a meeting of Greek politicians.
The highs in the New Zealand dollar didn't last for long, with "a number of European headwinds cooling investors' appetite for risk," said Mike Jones, currency strategist at Bank of New Zealand.
"Not only did reports pour cold water on hopes the European Central Bank may play a hand in Greek debt restructuring, but rumours swirled Italian Q4 GDP may print negative."
Investors are split on Greece's ability to strike a deal with private bondholders. The debt-ridden nation still hasn't finalised negotiations on agreements to revamp its debt load in a way that garners the approval of European Union and International Monetary Fund officials who would provide a crucial financial bailout.
Jones said the US dollar spent the first half of the night on the back foot, as risk-sensitive currencies like the kiwi remained in vogue, with hopes a Greek rescue plan might be just around the corner after reports China may invest US$100 billion in rescue facilities.
The New Zealand dollar climbed to a new five-month high against the yen after Japan's current account surplus sharply shrank to a 15-year low in 2011, driven by the nation's first trade deficit since 1980. March's earthquake and tsunami hurt exports and increased its reliance on fuel imports.
In Europe, the European Central Bank is widely expected to keep its key interest rate at a record low 1 per cent on Thursday. The Bank of England's policy committee also meets to review monetary policy on Thursday.
In New Zealand, traders will be watching today's household labour force survey for direction on the jobs market, with economists picking the unemployment rate will fall 0.1 percentage point to 6.5 per cent.
The New Zealand dollar climbed as high as 64.66 yen overnight up from 64.38 at 5pm yesterday, it traded at 64.34 yen just after 8.30 am. The kiwi fell to 62.88 euro cents from 63.07 cents yesterday at 5pm. It was little-changed on 77.31 Australian cents from 77.39 cents and 52.77 British pence from 52.86 pence.
The trade-weighted index was little-changed on 73.09 from 73.12.