The New Zealand dollar rose to an eight-week high against the Australian dollar as investors mull the potential for an interest rate reduction at the Reserve Bank of Australia meeting tomorrow.

The kiwi touched 91.89 Australian cents and was trading at 91.66 cents at 8am in Wellington, from 91.08 cents at 5pm on Friday. The local currency was trading at 69.65 US cents from 69.73 cents at the New York close and 69.75 cents on Friday.

See live rates for the NZ-US $ below. Click for more information:NzForex Foreign Exchange Transfers

The Australian dollar has weakened after a report last week showed inflation fell in the March quarter, surprising economists who had expected a gain and prompting speculation the RBA may cut interest rates further.

PMI data released at the weekend showed manufacturing activity in China, the largest export market for New Zealand and Australia, expanded marginally for a second month, with a reading of 50.1 in April, easing from the 50.2 level in March and only just above the 50-point mark that separates expansion from contraction.


Today, the local focus will be on an Australian NAB business confidence report ahead of the RBA meeting tomorrow.

"The market now assigns around equal odds to a cut tomorrow, ensuring there will be a notable currency response regardless of the outcome," Bank of New Zealand senior market strategist Kymberly Martin said in a note.

"The slightly softer China PMI releases over the weekend limit the prospects for a rebound in the Australian dollar into tomorrow's meeting. However, keep an eye out for the release of the Australian NAB business survey, due this afternoon."

BNZ's Martin said her NAB colleagues in Australia believe last week's low inflation reading offers the RBA the opportunity to add more support to the domestic economy, without risk to its inflation target.

They see a cut tomorrow as likely, even though the economy continues to reveal resilience in the face of the resources sector downturn, she said.

The New Zealand dollar fell to 60.79 euro cents from 61.22 cents on Friday, declined to 74.04 yen from 74.77 yen, and slipped to 4.5090 yuan from 4.5155 yuan. It advanced to 47.71 British pence from 47.60 pence. The trade-weighted index was little changed at 73.34 from 73.31 at the end of last week