The New Zealand dollar touched a month-high after Reserve Bank governor Graeme Wheeler talked down the chances of another rate cut, while the greenback slipped on growing speculation the Federal Reserve won't hike rates anytime soon.
The kiwi touched 66.97 US cents, and was trading at 66.85 cents at 8am in Wellington, from 65.39 cents at 5pm yesterday. The trade-weighted index gained to 72.82 from 71.99 yesterday.
The dollar index, which measures the greenback against a basket of currencies, touched a three-month low after weaker-than-expected US services sector data and comments from New York Fed President William Dudley to the MNSI newswire that a significant global downturn and higher US dollar could hurt the US economy, and that policymakers would have to take into consideration the considerably tighter financial conditions since the Fed's December meeting.
The kiwi gained after strong labour market data and Wheeler's comments in his first public speech of the year that dismissed the need for a knee-jerk reaction to weaker inflation caused by slumping oil prices, and suggested that "some recent inflation indicators are encouraging".
"This confirmed the bank's lack of urgency in responding to the weak inflation dynamic, sending the New Zealand dollar higher," Bank of New Zealand currency strategist Jason Wong said in a note.
The market has recently shifted from pricing in a rate hike next year to a possible rate cut this year, so it will be interesting to see the BoE's interpretation of recent data.
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"While most local observers would not have been surprised by the speech's content or tone, offshore players likely read the speech as hawkish.
"The US dollar is weaker across the board, with the New Zealand dollar at the top of the leaderboard. The market has been heavily positioned for US dollar strength so liquidity can evaporate quickly when everyone wants to adjust positions at the same time," Wong said.
Reserve Bank assistant governor and head of economics John McDermott is scheduled to speak in Sydney today, on 'Forward guidance - enhancing monetary policy in New Zealand', followed by the bank's head of prudential supervision Toby Fiennes who will speak in Auckland on 'Taking Stock and Looking Ahead'.
Finance Minister Bill English is due to speak at a wharf opening at Lyttelton Port in Christchurch.
In the UK, the Bank of England is holding its first meeting of the year.
"No change to policy is expected, but the inflation report will be widely read for hints about the next move," said the BNZ's Wong. "The market has recently shifted from pricing in a rate hike next year to a possible rate cut this year, so it will be interesting to see the BoE's interpretation of recent data."
The New Zealand dollar advanced to 45.68 British pence from 45.37 pence yesterday, rose to 60.04 euro cents from 59.91 cents, and increased to 4.3964 yuan from 4.3025 yuan. It was little changed at 93.04 Australian cents from 93.10 cents yesterday, and at 78.26 yen from 78.25 yen.