The New Zealand dollar lost ground against the Australian dollar after consumer prices across the Tasman were higher than expected in the December quarter.
The kiwi traded at 95.08 Australian cents at 5pm in Wellington versus 95.46 Australian cents at 8am and from 95.43 cents yesterday. It was at 68.39 US cents from 68.36 cents yesterday.
The Australian dollar got a lift when the consumer price index rose 0.5 per cent in the December quarter, versus an expected 0.4 per cent increase. Annual CPI inflation was 1.8 per cent, also higher than the 1.7 per cent economists had been expecting.
Inflation was close to forecast but "as the markets were looking for a softer print the reaction was more consistent with an upside surprise," said Annette Beacher, chief Asia-Pacific macro strategist for TD Securities.
Given the exchange rate is weaker than the Reserve Bank of Australia assumed three months ago and oil is also substantially lower "we don't expect changes to the RBA's inflation profile in next week's Statement on Monetary Policy."
Imre Speizer, Westpac Banking Corp's head of NZ strategy, also said the CPI spurred the Aussie higher. He noted the Australian dollar has been very "punished for all manner of global risks for many months now."
As a result, the market is fairly short Aussie dollars and "can get spooked by a very mild upside surprise like the one we have today."
He said, however, it also benefited from a lift in iron ore prices after Vale signalled it will pull as much as 40 million tonnes out of the market as it looks to decommission 19 similar dams in the wake of the collapse of one of its tailings dams in southeastern Brazil.
Investors are now waiting for the Federal Open Market Committee, which is due to make its first policy statement of the year, followed by a press conference by chair Jerome Powell.
In December, the world's biggest central bank lowered its rate hike projections for 2019. Traders will watch for Powell's take on the latest economic data, which has shown weaker consumer confidence in the wake of the Federal government shutdown.
The trade-weighted index was at 73.78 from 73.85 yesterday. The kiwi traded at 52.27 British pence from 51.97 pence and was at 59.79 euro cents from 59.77 euro cents. It was at 74.79 yen from 74.65 yen yesterday and at 4.5926 Chinese yuan from 4.6099 yuan.
The two-year swap rate is at 1.9163 from 1.8950 per cent late yesterday; the 10-year swap rate is at 2.5600 from 2.5700.