The New Zealand dollar rebounded from its lowest level against the greenback since 2015 after the People's Bank of China didn't severely devalue the yuan, as many had feared, in retaliation to US President Donald Trump escalating the two nation's trade dispute.

In the event, the Chinese central bank set its currency at a rate of 7.0570 to the US dollar, compared with 7.0572 on Friday. The yuan is allowed to trade within 2 percent of the daily setting.

The kiwi was trading at 63.75 US cents at 5pm in Wellington, up from as low as 63.40 cents ahead of the PBOC setting, and from 63.77 at 7:50am. The trade-weighted index was at 71.17 points from 71.02.

Late on Friday, after most markets outside the US had closed, China announced it was retaliating against an earlier move by Trump by imposing tariffs of 5-10 percent on US$75 billion of US imports.


But Trump quickly upped the ante by increasing existing tariffs on US$250 billion of Chinese exports to the US from 25 percent to 30 percent and increasing the tariffs that kick in from mid-December on another US$300 billion of Chinese imports from 10 to 15 percent.

Later at the G7 meeting in France, Trump said he regretted the escalating trade war but then the White House said his remarks had been misinterpreted and that he'd meant he regretted not raising the tariffs higher.

"The New Zealand dollar started today looking at the rest of the world, asking: how is the world taking this?" says Peter Cavanaugh, the senior client advisor at Bancorp Treasury Services.

After China's Friday announcement, "rightly, people said Trump's not going to take this lying down. The market was expecting China to weaken the yen substantially so everyone's relieved for today and we're just waiting to see what shenanigans occur in the next 24 hours," he says.

The PBOC reaction today means that "the water is no longer lapping at the world's chin, it's at the world's neck," he says.

Nevertheless, "it wouldn't take much of a wave for the world to be faced with breathing under water."

Trump's tweeting overshadowed events at the meeting of central bankers at Jackson Hole in Wyoming.

But Cavanaugh says he wouldn't be surprised if other central banks start singing the same song as Reserve Bank of Australia governor Philip Lowe's speech to that meeting.


Citing a long list of current political shocks, including the trade war, Britain's Brexit woes, demonstrations in Hong Kong, the tensions between Japan and South Korea and the stresses in Italy, Lowe warned that "not surprisingly, the result is weaker global growth" and that easing monetary policy might not be enough.

An alternative to reduce those political shocks could be "fiscal policy, including through extra spending on quality infrastructure" and "structural reforms that encourage firms to expand, invest, innovate and hire people," he said.

The New Zealand dollar was trading at 94.65 Australian cents from 94.57, at 51.98 British pence from 52.01, at 57.20 euro cents from 57.11, at 67.13 yen from 67.01 and at 4.5545 Chinese yuan from 4.5231.

The New Zealand two-year swap rate fell to a bid price of 0.9267 percent from Friday's close at 0.9587 and the 10-year swap rate dropped to 1.1950 percent from 1.2775.