The New Zealand dollar advanced as concern US politicians have yet to reach agreement before this week's deadline for raising the nation's debt limit, risking default, weighed on the greenback.
The kiwi rose to 83.67 US cents at 8am in Wellington from 83.31 cents at the 5pm market close yesterday. The trade-weighted index gained to 77.64 from 77.34 yesterday.
The US dollar index, which measures the greenback against a basket of currencies, declined as the political gridlock continues. US politicians have been unable to agree on the budget with a partial government shutdown now entering its third week, and with Thursday's deadline looming for the debt ceiling to be lifted.
"The closer we get to the doomsday time, the more nervous markets are becoming and the greater pressure is on the US when there is no clear solution," said Peter Cavanaugh, client advisor at Bancorp Treasury. "If anything, there seem to be more talks. The good news is they are closer than they were a week ago, the bad news is they are still a long way apart.
"If the US does hit the debt ceiling and the worst case scenario is realised you could see a substantially weaker US dollar which could push the New Zealand dollar a lot higher."
In New Zealand, traders will be eyeing a speech by Reserve Bank deputy governor Grant Spencer at 9:30am in Auckland on the housing market.
Rapidly accelerating house prices in the country's two biggest cities has raised fears of an asset bubble emerging and prompted the Reserve Bank this month to impose restrictions on high loan-to-value ratio lending.
The Reserve Bank has signalled interest rates are set to rise from a record low 2.5 per cent next year and further increases are likely should LVR limits fail to stem rapidly rising house prices. Population expansion in Auckland is outpacing housing supply while Christchurch is being rebuilt following a series of earthquakes.
In Australia, the focus will be on the minutes of the Reserve Bank of Australia's Oct. 1 meeting, scheduled for release at 1:30pm New Zealand time. The minutes are expected to show the central bank is less inclined to cut the 2.5 per cent cash rate further.
Traders are pricing in 11 basis points of increases over the next year, compared with expectations for 8 basis points of reductions at the start of the month, according to the Overnight Swap Curve.
The New Zealand dollar advanced to 88.11 Australian cents from 87.96 cents yesterday and gained to 82.38 yen from 81.89 yen. The kiwi rose to 61.66 euro cents from 61.42 cents yesterday and increased to 52.33 British pence from 52.12 pence.