Currency: NZ dollar eases after CPI data and ahead of crucial RB decision

The New Zealand dollar fell across the board today after important quarterly inflation data printed lower than forecast.

Economists are split on whether the Reserve Bank still has enough reason to hike interest rates tomorrow. The decision to hike or leave the Official Cash Rate on 7.25 percent will determine the kiwi's direction, dealer said.

"If they don't go, the aussie cross rate could get hammered," said ANZ Bank dealer Mark Elliott.

In contrast to New Zealand, Australia today received higher than expected consumer price data, prompting economists to suggest the Reserve Bank of Australia will almost certainly hike at least twice more in the current round.

Although New Zealand's CPI came out at 0.7 percent, allowing the annual rate to drop from 4.0 percent in the June year to 3.5 percent, economists said non-tradeables inflation remained high and that was the Reserve Bank's main concern.

"The consensus is they will still hike," said Mr Elliott.

The kiwi ended the session on US66.04c after it had been trading at US66.25c before the release. It closed yesterday at US66.38c.

It fell as low as US65.87c and Mr Elliott said the market had been short going into the release, explaining why the reaction was restrained.

Against the Australian dollar, the kiwi fell to A86.81c, nearly a cent below its A87.62c close yesterday.

Against the euro it fell to at 0.5251 from 0.5292 and the trade weighted index ended on 66.62 from 67.07 yesterday.

Mr Elliott said that technically the kiwi had peaked and he believes rallies will be sold even if the Reserve Bank lifts the OCR tomorrow.

Meanwhile, major markets are on tenterhooks ahead of a decision by the US Federal Reserve on rates.

The US dollar slipped ahead of the decision as markets wait to see if the central bank will reiterate that inflation risks are a concern even as the housing market cools.

The Fed is seen all but guaranteed to keep rates at 5.25 percent for the third straight policy-setting meeting on Wednesday but market participants will comb through its post-meeting statement for clues to its outlook on rates.

"Talk in the markets of a possible rate cut has dropped off, but the prospect of a rate rise is still some time off, so it could be hard for the dollar to move after the statement," said Takehiko Jimbo, forex manager at Mitsubishi UFJ Trust and Banking.

A run of fairly solid US economic data this month has laid to rest speculation that the Fed could lower rates in the near term, while Fed officials have said the inflation outlook remains unclear and price risks remain.

The Australian dollar climbed nearly half a percent against the US dollar to US76.07c just under a six-week high.

Reuters currency rates:

5pm today 5pm Tuesday

NZ dlr/US dlr US66.04c US66.38c
NZ dlr/Aust dlr A86.81c A87.62c
NZ dlr/euro 0.5251 0.5292
NZ dlr/yen 78.72 79.26
NZ dlr/stg 35.22p 35.45p
NZ TWI 66.62 67.07
Australian dollar US76.07c US75.78c
Euro/US dollar 1.2572 1.2545
US dollar/yen 119.21 119.40

- NZPA