Currency: No respite for dollar as rate call looms

The dollar is expected to remain strong leading into this week's interest rate decision by the Reserve Bank.

Last week the kiwi gained the most among major currencies as economic reports dampened concern the bank would cut its interest rate.

Reserve Bank Governor Alan Bollard is expected to leave it unchanged at 6.5 per cent when he makes his decision on Thursday.

The kiwi rose for a fifth week in six as reports showed consumer prices and retail sales lifted more than expected. Investors cut bets the central bank would lower interest rates, futures contracts showed.

"These kinds of numbers will only increase the chances that rates will remain at high levels for longer," said Greg Gibbs, a senior currency strategist at RBC Capital Markets in Sydney. The economic figures have "given the kiwi a boost".

The kiwi climbed 2.2 per cent last week to 71.46USc from 69.93c on January 14, the best performer among the 16 major currencies Bloomberg tracks.

It rose on Friday after a Government report showed retail sales gained 0.7 per cent in November, more than the 0.5 per cent predicted in a Bloomberg News survey.

The kiwi could reach 72USc in the second quarter, RBC Capital's Gibbs said.

Two of 12 analysts surveyed on January 20 by Bloomberg said they expected the central bank to cut its benchmark rate a quarter percentage point to 6.25 per cent in the second quarter.

The dollar "will extend the gains that we've seen over recent days", said Nick Bennenbroek, a currency strategist at Brown Brothers Harriman in New York.

"Attractive yields are going to be with us a while longer."

At 6.5 per cent, New Zealand's benchmark interest rate is 1.25 percentage point more than Australia's, 4.25 points more than the US target rate and 4.5 points above that of the European Central Bank. Japan's benchmark rate is near zero.

Demand for the extra yield available on New Zealand-dollar denominated assets over counterparts abroad helped push up the local currency about 10 per cent against the US dollar in 2004.

The yield on New Zealand's three-month bank bill futures contract due September, a gauge of where interest rates will be in the third quarter, was 6.73 per cent yesterday, compared with 6.55 per cent on January 14.

The futures settle to the level of the three-month bank bill, which yielded an average 22 basis points, or 0.22 percentage points, above the central bank's key rate in the past five years.

Consumer prices rose 2.7 per cent in the fourth quarter from a year earlier, a January 19 report showed. Economists forecast a gain of 2.5 per cent, according to a Bloomberg survey.

The yield on the 6 per cent bond maturing April 2015 rose 2 basis points to 5.97 per cent, or 1.79 per centage points more than the US 10-year Government bond yield.

- BLOOMBERG