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NZ dollar gains after RBNZ signals rates still going up

The New Zealand dollar rose after the Reserve Bank kept its key rate on hold, while signalling interest rates will have to go up as the economy grows at a faster pace.

The kiwi climbed to 78.12 US cents from 77.01 cents at 8am and 76.83 cents yesterday. The trade-weighted index advanced to 78.41 from 77.45 yesterday.

RBNZ governor Graeme Wheeler kept the official cash rate at 3.5 percent, and said future rate hikes will be more gradual than previously expected due to modest inflation pressures. He tried to talk down the kiwi again, calling its strength unjustified and unsustainable, and that he expected a significant decline. The central bank also trimmed its forecast for the 90-day bank bill rate, often seen as a proxy for the OCR, though some traders were surprised Wheeler retained the bias towards higher rates.

"We've got a stable government, a liquid currency, a good bond market, high yield - it's just like a red rag to a bull," said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional in Auckland. "You can't be having a tightening bias and expect the currency to go lower."

ASB's Kelleher said the currency will probably find resistance at 78.50 US cents, and may gain through the month, as "December is a notoriously strong month of the kiwi."

The RBNZ's Wheeler said he was surprised by the reaction in the currency to today's monetary policy statement, with market pricing for rate hikes in late 2015 or early 2016, and as the greenback rallies in anticipation the Federal Reserve will move away from running a zero interest rate policy next year.

"We were a bit surprised when we saw the nine o'clock jump up in terms of the signalling that's commensurate with the MPS," Wheeler said at his media conference in Wellington.

ASB's Kelleher said Wheeler will struggle to get any more traction by trying to talk it down and will have to come up with something else if he wants to get the currency lower.

The kiwi rose to 93.69 Australian cents from 92.59 cents yesterday after Bureau of Statistics figures showed the country added 42,700 jobs last month, most of which were part-time. Australian employment figures have been increasingly volatile this year, and the government department this week agreed to tweak its methodology to improve the series.

The local currency gained to 92.20 yen at 5pm in Wellington from 91.62 yen yesterday, and increased to 62.73 euro cents from 62.05 cents. It advanced to 49.70 British pence from 49.02 pence yesterday.