NZD Climbs to New High Amid Weaker Dollar

NZD/USD extended gains on Tuesday, trading near 0.59781, after earlier touching 0.5980, its highest level since June 1. The US dollar index remained under pressure as markets scaled back expectations for an imminent Federal Reserve rate hike, while prospects of further monetary policy tightening by the Reserve Bank of New Zealand provided support for the kiwi.

**Weaker Dollar as Key Driver**

The dollar index, which measures the greenback against six major currencies, fell to around 98.65 in recent trading, down about 0.23% on the day. Diminished expectations for an immediate Fed rate hike left the dollar broadly on the defensive. In this context, the NZ dollar, as a commodity currency, gained momentum, rising for a third consecutive session and on track for a solid weekly performance.

**RBNZ Rate Hike Expectations Provide Support**

The RBNZ's policy rate currently stands at 2.50%, but the overnight index swap curve reflects market expectations of nearly 100 basis points of tightening over the next 12 months. According to MUFG analysts, with New Zealand's current inflation rate at 4.1%, the real policy rate remains more negative than in most other G10 economies, which may be encouraging speculative buying. However, MUFG also warned that while a 100-basis-point tightening could prove excessive, the scale of NZ dollar short positions appears more extreme, and the threshold for a significant further decline in the NZ dollar at current levels is relatively high.

**Focus on Subsequent Risk Factors**

Investors are currently awaiting US PMI data, while US-Iran tensions have brought inflation risks and potential safe-haven demand into focus. The recent escalation in US-Iran conflict pushed Brent crude futures back above $95 per barrel at one point, further heightening risks of persistently high inflation, leading markets to abandon expectations for easing policy in the second half of next year. These factors could influence the dollar's trajectory and the NZ dollar's subsequent direction.