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The New Zealand dollar gained after the largest rise in the dairy prices since July, and ahead of tomorrow's Reserve Bank review of the official cash rate where rates are expected to stay on hold.
The kiwi dollar rose to 77.96 US cents overnight from 77.73 at 5pm yesterday.
Fonterra Cooperative's latest online milk auction showed average prices rose 2.6 percent, the highest level since July, with gains in both whole and skim milk powder, the biggest products on offer.
That underpinned support for the kiwi dollar and bolstered confidence New Zealand's biggest export earner is set to enjoy elevated prices for some time.
"This concurs with our view that prices are likely peaked early this year but are now stabilising," Kymberly Martin, market strategist at Bank of New Zealand.
That comes ahead of tomorrow's central bank meeting, where Governor Alan Bollard is tipped to keep the benchmark rate on hold at a record-low 2.5 percent, and push out the expected track of future interest rate rises.
Traders are betting Bollard will cut 1 basis point from the OCR over the coming 12 months, according to the Overnight Index Swap curve.
If Bollard holds rates, that will reduce the yield advantage across the Tasman.
The Reserve Bank of Australia yesterday cut the target cash rate a quarter-point to 4.25 percent, with Governor Glen Stevens saying Europe's sovereign credit woes and banking problems are starting to weigh on Asian economies, and heightening the threat of a global economic slowdown.
Peter Cavanaugh, senior client advisor at Bancorp, said "over the next 24 hours the kiwi is likely to be watching the world and waiting for the Reserve Bank," as it continues to trade in a tight range.
Other central banks to review monetary policy this week are the Bank of England, the Bank of Canada and the European Central Bank.
Yesterday, ratings agency Standard & Poor's said it might cut the credit rating of the 15 euro zone nations, including Germany and France, as the region's members struggle with rising sovereign debt.
German Chancellor Angela Merkel and French President Nicolas Sarkozy met on Monday to nut out an agreement which they will put forward to European Union members at a leaders' summit on Friday to impose tighter fiscal controls and greater economic integration.
The summit in Brussels is being described as a "do-or-die" effort to resolve the debt-crisis.
Bancorp's Cavanaugh said "they have to do something," and financial markets want a decision rather than yet another meeting.
Locally, Statistics New Zealand releases its third-quarter wholesale trade data later this morning.
The kiwi rose to 58.22 euro cents from 58.13 cents yesterday, and gained to 50.02 British pence from 49.75 pence. The kiwi was little changed at 60.59 yen from 60.51 yen yesterday and dropped to 76.11 Australian cents from 76.17 cents.
The trade weighted index rose to 69.01 from 68.91.