The New Zealand dollar dropped to a new two-and-a-half year low as rising US wages firmed up expectations for the Federal Reserve to hike interest rates twice more this year.

The kiwi fell as low as 65.13 US cents and was trading at 65.17 cents at 5pm in Wellington from 65.33 cents on Friday in New York. The trade-weighted index was at 71.10 from 71.23 last week.


The greenback followed US Treasury yields higher as interest rate market pricing showed investors see a US rate hike as a certainty this month and place an 80 per cent chance on another increase in December.


That's in contrast to New Zealand where investors are now pricing in a near-50 per cent chance the Reserve Bank will cut the official cash rate during the coming year.

"We had pretty good data from the US on Friday - US 10-year yields on are on the rise, and the US dollar index is on the rise for the front end of the week," said Martin Rudings, a senior dealer in foreign exchange at OMF.

The kiwi may extend its fall to 64.40 US cents as the "US dollar continues to rally," he said.

Local data today showed New Zealand's manufacturing sales shrank in the June quarter due to outages at a refinery and gas field.

Bank of New Zealand economists trimmed their forecast for second-quarter gross domestic product growth to 0.6 per cent from 0.8 per cent on the release. Rudings said that helped push the kiwi dollar lower during local trading.

President Donald Trump's plans to impose new tariffs on US$200 billion of Chinese imports are increasing uncertainty for investors.

The trade war between the US and China has been weighing on the New Zealand and Australian currencies given those nations depend on China as an export destination. Rudings said those fears aren't going to change any time soon.

The kiwi rose to 4.4702 Chinese yuan from 4.4664 yuan last week and traded at 91.66 Australian cents from 91.71 cents.

The local currency fell to 72.31 yen from 73.42 yen yesterday. It 56.44 euro cents from 56.48 cents last week and was little changed at 50.47 British pence from 50.45 pence.
New Zealand's two-year swap rate was unchanged at 1.96 percent and the 10-year swap increased by 2 basis points to 2.81 per cent.