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The New Zealand dollar is within striking distance of its post-float high against the US dollar, due mostly to weakness in the greenback and a sluggish American economy.
At this afternoon's level of US87.92c, the currency is just short of its post 1985 float high of US88.42c, which was set on August 1, 2011.
Foreign exchange strategists said a push in the currency beyond the 2011 record was possible over the next couple of days.
"Will it break through? Yes, there is every chance because it is looking quite strong," Westpac senior market strategist Imre Speizer said. "The main reason, still, though is US dollar weakness rather than Kiwi dollar strength," he said.
Just as in 2011, strategists said New Zealand dollar's strength was more to do with US dollar weakness than Kiwi-specific factors, although an overnight credit rating outlook upgrade by Fitch and the prospect of higher domestic interest rates were clearly supportive for the Kiwi.
In 2011, political wrangling over the US budget deficit and the spectre of the US defaulting on its debt repayment obligations put the US dollar on a downward slide, adding upward pressure on many currencies, the Kiwi included.
Overnight, weakness in US equities translated into buying interest in the US bond market. When bond prices rally, yields fall, and so when the US 10-year bond yield fell by five basis points to just 2.56 per cent, the greenback came under renewed selling pressure.
"Last night, the price action was about an extended US equity market that needed to pulled back, so that caused a shift out of equities and into US bonds, which pushed down US interest rates and pushed down the US dollar," Speizer said.
On Wall Street, the S&P 500 equity index fell 0.7 per cent, leaving it 1.1 per cent below last Thursday's closing high of 1,985.44. The Dow dropped 0.7 per cent and ended back below 17,000.
The Kiwi shifted higher to US88.05c after Fitch reaffirmed the country's AA rating and upgraded its outlook to positive from stable. The New Zealand dollar has gained almost 6 cents against the US dollar so far this year.
Yield seeking overseas investors have good reasons to buy. The Reserve Bank has increased the benchmark interest rate three times this year to 3.25 percent and is expected to hike again this month in an attempt to curb inflation. In sharp contrast, rates in most other developed countries are at or near historical lows.
"As one of the only two currencies with any appreciable yield in the advanced industrialised universe, the kiwi has been the darling of the yield chasers and (the) upgrade by Fitch will only serve to reinforce its strength," Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York, said in a note.
- By Jamie Gray, APNZ business reporter; additional reporting Businessdesk