LONDON (Reuters) - A 1.5 percent surge for the New Zealand dollar after interest rates there were kept on hold was by far the biggest move in major currency markets on Thursday, while the U.S. dollar hit a five-week low against the yen.
The Reserve Bank surprised some investors who had been betting on a rate cut and its concerns over rising house prices and emerging inflationary pressures cooled expectations that the bank will cut soon.
While growth remains shaky and price growth extremely low, along with its Australian and Canadian counterparts, the kiwi dollar has been steadily recovering since reaching long-term lows in January of this year.
In early European trade it was up 1.4 percent at $0.7121, off a high of $0.7148 hit in Asian time.
"The kiwi went on a rampage after the RBNZ kept rates on hold," said Tobias Davis, head of corporate treasury sales at Western Union in London.
"Governor Wheeler's comments centred around data being a decision driver, inflation expectations anchoring and the fact that strong property prices were a cause for concern. We think downside risks remain, along with the chance of a cut in August."
The big developed world foreign exchange markets have been struggling for direction this week after the U.S. dollar saw its worst day in six months on the back of shockingly poor jobs numbers last Friday.
The index that tracks the U.S. currency's strength against a basket of its peers has fallen every day this week, but the losses have been limited and it was all but flat on Thursday.
Still, expectations for further rises this year in Federal Reserve interest rates are back near rock bottom, along with expectations for global growth, and the dollar was down half a percent to 106.32 yen by 0730 GMT.
"Dollar-yen has traded in a broad 105–111 range over the past two months as markets continuously reassess the timing of Fed rate hikes," analysts from UBS Wealth Management said in a note.
They argued increased hedging of FX exposure by major Japanese pension funds would weigh on any rebound for the dollar, seeing the dollar stabilising at or around 110 yen over the next 12 months if the Fed does gradually raise rates.
"A bigger rebound cannot be ruled out, but will likely be met with hedging activities," they said.
The dollar was 0.3 percent lower at 106.63 yen, moving back toward Monday's one-month low of 106.35.