FOREX-Kiwi recoils on NZ central bank warning, dollar nurses losses

Tue May 6, 2014 7:55pm EDT

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* USD breaks decisively lower after weeks of range trading

* China services report, Aussie retail sales in focus

By Ian Chua

SYDNEY, May 7 (Reuters) - The New Zealand dollar tumbled on Wednesday after the country's central bank warned it may have to intervene to weaken the currency, while the U.S. dollar languished at six-month lows against a basket of major currencies.

Reserve Bank of New Zealand Governor Graeme Wheeler said if the currency stayed high in the face of worsening fundamentals, "it would become more opportune for the Reserve Bank to intervene in the currency market to sell NZ dollars."

The kiwi dropped more than half a U.S. cent on his comments, falling as far as $0.8693 from $0.8770 in early trade. It was last at $0.8707, having erased almost all of its overnight gains.

Still, the kiwi was not far from a 2-1/2 year high of $0.8779 hit overnight when the U.S. dollar had come under broad pressure, underscoring New Zealand policymakers' discomfort with the currency's strength.

The dollar index slid to its lowest in over six months on Tuesday in a surprisingly decisive move after weeks of range trading. It was last at 79.139, not far from the trough of 79.060.

Frustration has been growing among some players at the dollar's inability to move higher, especially after last Friday's upbeat payrolls report and as the Federal Reserve continued to scale back its bond-buying support.

The market seems to be coming to the view that the Fed is still a long way off from raising interest rates even after the end of its quantitative easing programme expected later this year.

Coupled with tame inflation, this has allowed U.S. Treasury yields to keep falling and thus erode the appeal of the greenback.

"The heaviness of U.S. yields seems to be producing further unwinding of (perhaps long-held) long USD positions," noted Sean Callow, strategist at Westpac Bank.

Fed Chair Janet Yellen is widely expected to hammer home the Fed's dovish position at her congressional hearings on Wednesday and Thursday.

"Markets will be attentive for any indication on the Fed's thinking in terms of rate hike timing and pace, but the message so far this year has been clear: the timing and pace of hikes is not predetermined and is data dependent," analysts at BNP Paribas wrote in a note to clients.

With the dollar on the retreat, sterling climbed to a near five-year peak of $1.6866, while the Australian dollar touched a two-week high of $0.9367.

Against the yen, the dollar slipped to a three-week low of 101.49.

The euro, meanwhile, rose to its highest in two months at $1.3952, putting more pressure on the European Central bank to ease policy at its meeting on Thursday.

ECB President Mario Draghi recently said further currency strength could be a potential trigger for policy action.

The safe-haven yen might gain more momentum if a survey on China's services sector due at 0145 GMT were to disappoint. For the Aussie dollar, further strength in the retail sales data due out at 0130 GMT could offer the currency even more support.

On Tuesday, the Aussie edged up after the Reserve Bank of Australia kept interest rates steady as expected and appeared resigned to the currency's strength. (Editing by Shri Navaratnam)

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