June 12, 2014 / 11:21 AM / 4 years ago

FOREX-Kiwi surges on aggressive rate message, euro under pressure

* Euro back on verge of 4-month low vs dollar

* Kiwi jumps after RBNZ raises interest rates, keeps hawkish bias

* Euro slips to near 13-month low vs New Zealand dollar (Updates prices, comment)

By Patrick Graham

LONDON, June 12 (Reuters) - New Zealand’s dollar powered to four-month highs against its U.S. counterpart on Thursday after the country’s central bank raised interest rates and quashed any speculation it was ready to slow its campaign of monetary tightening.

The kiwi was the outstanding mover on major currency markets marked this week by steady pressure on the euro after the European Central Bank cut its own base rates and unveiled a raft of measures to support lending and growth.

While much attention this year has focused on sterling and the prospect that British rates will rise well ahead of those in the United States and Europe, New Zealand’s Reserve Bank started raising borrowing costs months ago.

Its third hike in as many policy meetings was universally expected and brought base rates to 3.25 percent at a time when those in all the major developed economies are at or near zero. But it was the bank’s determination to press on with the fight against inflation in months ahead that surprised markets most.

“We, and I think everybody else, were expecting a much more dovish message and the statement was clearly a shock,” said one London-based spot dealer.

By mid-morning in Europe, the kiwi had gained 1.6 percent on the day to $0.8687. Against the euro it hit its highest in just over a year.

Whether that is the start of another shift higher or just a blip remains to be seen. After rising 14 percent between August and the start of May, the kiwi had fallen steadily in the past month, a sign that the market viewed most of its tightening cycle as priced in.

“A slowing PMI and low food prices might dampen the euphoria tomorrow, allowing 0.87 to cap,” Commerzbank analysts said in a morning note. “(But) everything all told, the NZD remains on an uptrend as it offers good yields with a rising trend in an environment of globally low yields.”


The euro has fallen almost 1 percent this week as the effect of the ECB’s cut in rates last week spread through markets but the jury remains firmly out on whether the bank has managed to turn the tide.

A stronger dollar on the basis of improvement in the U.S. economy and a resulting rise in Treasury yields was many banks’ base scenario for 2014 at the start of the year.

That finally seems to be happening to some extent, and may be aided by a strong U.S. retail sales report later on Thursday, but there has been strong support for the euro around $1.3520.

“We are certainly more confident on the dollar than we were three months ago,” said Andrew Wilson, CEO of Goldman Sachs Asset Management in London. “The actions of the ECB last week made it pretty clear that they are going to be very accommodative for a long time. So this is a positive dollar environment.”

Like others, he sees U.S. bond yields continuing to rise while euro equivalents remain very low. The spread between U.S. and German 10-year yields inched up to 125 basis points and is at its highest since 1999, according to Reuters data.

In morning trade in Europe, the euro again tested levels close to last week’s four-month low of $1.3503, hovering around $1.3523.

“It does feel like lower yields are starting to weigh on the euro,” said Paul Robson, a currency strategist at RBS in London.

“I don’t quite want to jump on the bandwagon yet - the reasons for the euro’s strength this year have not quite gone away. Yes it may go through $1.35 but I don’t think it will go much beyond that.”

RBS has a target of $1.27 for the euro by the end of the year. (Editing by Catherine Evans)

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