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NZ dollar holds gains as heavy yen selling puts pressure on greenback

The New Zealand dollar held its gains in local trading as the yen fell amid speculation that nation's government may call a snap election spilled over into other cross-rates, prompting investors to trim their greenback holdings.

The kiwi climbed to 91.05 yen at 5pm in Wellington, near a seven-year high, from 90.50 yen yesterday.The local currency traded at 78.67 US cents from 78.19 cents yesterday. The trade-weighted index rose to 78 from 77.49.

Japan's yen was at its weakest in seven years this week, recently trading at 115.72 per US dollar, as speculation grew that Prime Minister Shinzo Abe may call an early election to secure a mandate to continue its economic reforms, including a hike to sales tax. The heavy selling of the yen forced traders holding short positions, where they bet an asset will depreciate, in currencies such as the New Zealand dollar have had to buy kiwi as it gains with demand from those investors exiting Japan's currency.

"When you get massive selling of the yen and the crosses are all rising - kiwi/yen, Aussie/yen - the people that are short those currencies against the US can quite easily get squeezed out because there's immense pressure for them to go up," said Martin Rudings, senior dealer foreign exchange at OMF in Wellington. "We just saw the market fall on their sword a wee bit in the last couple of days."

OMF's Rudings still expects the US dollar to appreciate over the medium-term as the Federal Reserve starts to move away from running a zero interest rate policy on an improving US economy. That puts the Federal Open Market Committee meeting in December under more scrutiny, as it gives the central bank a chance to stake out its view for 2015.

The kiwi dollar climbed to 90.92 Australian cents from 90.03 cents yesterday after Reserve Bank of Australia assistant governor (economic) Christopher Kent told economists in Sydney the central bank hasn't ruled out intervening in foreign exchange markets.

Surveys today showed New Zealand's housing market continued to soften in October, while manufacturing activity was at a 15-month high in that month, and consumer confidence dipped to a 14-month low. Government figures showed flat food prices in October.

The local currency rose to 49.86 British pence from 49.14 pence after the Bank of England yesterday cut its inflation forecast, and signalled interest rates aren't likely to rise any time soon. The kiwi climbed to 63.22 euro cents from 62.79 cents yesterday.