[SYDNEY] The Australian and New Zealand dollars crawled higher on Thursday, trying to recoup losses suffered after the US Federal Reserve said a pullback in inflation was temporary and there was no need for lower interest rates.

The Aussie dollar nudged up to US$0.7021, having slipped 0.5 per cent overnight to as low as US$0.7007. The kiwi dollar was holding on at US$0.6630, after losing 0.8 per cent overnight to a trough of US$0.6617.

The Fed's steady outlook stood in stark contrast to the situation in Australia and New Zealand, where investors are wagering that rates will be cut, perhaps as soon as next week.

The Reserve Bank of Australia (RBA) holds a policy meeting on May 7 and is under pressure to ease given disappointing inflation and persistent falls in house prices.

Futures markets imply around a one-in-three chance of a cut in the 1.5 per cent cash rate while a Reuters poll of analysts found a sizable minority tipping a reduction, though most think the RBA will wait a while.

"If they do go, there is a strong prospect there will be at least one more cut in fairly short order and chances are we will see the AUD head toward the lower edge of the US$0.68-US$0.73 range," said Ray Attrill, head of FX strategy at NAB.

"If there's no move on May 7th, we should see at least a temporary bounce in all things AUD as markets push rate cut timing into the second half of the year."

Much the same goes for the kiwi and the Reserve Bank of New Zealand (RBNZ), which has a policy meeting on May 8.

The market implies a bit more than an even chance the central bank will cut its rate 25 basis points to 1.5 per cent largely in response to weak inflation and sluggish wage growth.

The call is complicated by the fact this will be the first meeting under a new policy committee which includes three external members, adding extra uncertainty to the mix.

"There is no great urgent economic crisis that needs to be addressed at the May meeting," noted Sean King at Triple T Consulting. "The new Committee members may wish to take a little more time to get themselves familiar with the reports, the process and the analysis before voting to lower rates."

"At this stage our expectation remains that the RBNZ will leave the cash rate on hold, but the decision is likely to be a close run thing."

Investors still assume an easing is only a matter of time, and two-year yields remain far below the 1.75 per cent cash rate at 1.435 per cent.

Likewise, Australian three-year yields of 1.29 per cent are well short of the cash rate. Three-year bond futures were off 1.5 ticks on Thursday at 98.730, while the 10-year contract dipped half a tick to 98.2000.

REUTERS