NZ dollar slips to lowest in 3 weeks, Aussie range-bound

[SYDNEY] The New Zealand dollar languished near three-week lows on Tuesday as investors unwound long positions fearing the country's central bank could turn more dovish at its policy review this week.

The Reserve Bank of New Zealand (RBNZ) is all but certain to leave cash rates at a record low 1.75 per cent on Thursday and analysts suspect policymakers will reinforce the need for low rates, given sagging inflation.

The New Zealand dollar was down at US$0.7354, having lost 0.75 per cent overnight in its largest daily drop in almost two months.

The kiwi had risen more than 10 per cent in the past three months, a big factor compressing inflation.

"The fall (in the kiwi) likely reflects traders reducing net long positions ahead of the monetary policy statement, which isn't expected to be supportive to the NZD, with inflation tracking lower than the RBNZ projected back in May," said Jason Wong, BNZ senior markets strategist.

An RBNZ survey on Monday showed inflation expectations for two years ahead had slipped to 2.09 per cent, from 2.17 per cent in the second quarter.

Across the Tasman Sea, the Australian dollar held at US$0.7921, within sight of a recent two-year peak of US$0.8066.

It has been trading in a tight range of US$0.7892-US$0.7980, after repeatedly failing above the crucial US$0.8000 mark. It is up 6.7 per cent since June.

The Aussie pulled back briefly after weaker-than-expected trade data from China which showed exports rose 7.2 per cent from a year earlier and imports grew 11 per cent.

The Aussie has found support from a recent run of upbeat domestic indicators.

A measure of Australian business conditions soared to a 9-1/2 year high in July and profits stayed strong. This follows a monthly gain in job advertisements on Monday, suggesting employment was rebounding.

"The global economy has improved, interest rates are low, wage pressures are contained and consumers are spending. So business conditions are the best in almost a decade," said Craig James, chief economist at CommSec.

"The only real negative has been the recent appreciation of the Aussie dollar."

The rise in the Aussie is one reason markets see little likelihood of an interest rate hike from the Reserve Bank of Australia, even though it is worried about speculation in the housing market and high household debt.

Australian government bond futures were mixed, with the three-year bond contract down one tick at 98.060. The 10-year contract inched one tick higher to 97.3700.

New Zealand government bonds gained, sending yields seven basis points lower at the long end of the curve.

REUTERS