The New Zealand dollar rose to a seven-month high against the euro on concern deposit holders in other weak euro-zone nations could face a Cyprus-style hit, spurring a flight of capital.
The kiwi climbed to 65.58 euro cents, the highest since August last year, from 65.20 cents at 5pm in Wellington yesterday. The New Zealand dollar traded at 83.70US cents from 83.75 cents.
Europe has climbed back into focus as Italy struggles to form a new government and investors digest the ramifications of the 10 billion euro Cypriot bailout that is partly funded by bondholders and depositors. Cypus is preparing to re-open its banks after they were closed last week to prevent a run by depositors. Bonds fell in Italy, Spain, Greece and Cyprus.
The potential of depositors being hit in other weak euro-zone countries as part of a bail-out "may incite some capital flight, which would further worsen those banking systems," said Imre Spiezer, senior markets strategist at Westpac Bank. "It is something the market is worried about - not suggesting it will happen but it is a risk."
The kiwi may climb as high as 66.30 euro cents in the next few days, he said.
The trade-weighted index edged up to 77.07 from 77 and the kiwi rose to 55.34 British pence from 65.20 pence.
The kiwi rose to 80.14 Australian cents from 80.02 cents and fell to 79.05 yen from 79.43 yen.