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By Naomi Tajitsu
WELLINGTON (Reuters) - The New Zealand dollar hit a one-week high on Thursday, boosted after the country's central bank suggested that currency strength was not yet a deterrent to further interest rates rises, while also signaling that another hike may come at its next meeting.
The kiwi climbed to $0.8626 in the Australasian session, after the Reserve Bank of New Zealand raised rates by 25 basis points to 3.0 percent in a widely expected decision.
Ahead of the announcement it traded around $0.8585.
The kiwi gained across the board, pushing its value against a currency basket to 80.25, its highest since last week. Versus the Australian dollar the kiwi hit a two-week high around NZ$1.0770.
The RBNZ said in a statement that it would monitor the extent to which strength in the kiwi, whose trade-weighted index (TWI) hovers near a post-float high, would lower inflation, stopping short of suggesting that it could slow the pace of future rate rises.
This supported market expectations that the RBNZ may raise rates again in June, which prompted investors to buy back positions in the currency, which were sold off in the past week.
"The market had expected the Reserve Bank to be more vocal about strength in the TWI kiwi that it was having an impact on their rate forecast," Bank of New Zealand currency strategist Raiko Shareef said.
"But they didn't come out and say that, they just made a qualifying statement, so it was considered to be less aggressive on the currency."
He added that markets were pricing in roughly an 80 percent chance that the RBNZ would lift rates against at its next policy review in June, largely unchanged from before the announcement.
Interest rate futures were little changed, while forward rates indicate around 110 basis points' worth of tightening in the next year.
The Australian dollar poked up to a session high of $0.9294, edging up on the kiwi's coattails, but eased back to a$0.9285 as the Aussie sold off against the kiwi.
The Aussie suffered on expectations that New Zealand rates would continue to rise this year while pressure may ease on the Reserve Bank of Australia to tighten monetary policy this year, particularly after a surprisingly tame inflation reading released on Thursday.
Market participants said the kiwi may rally further later in the global session, while adding that local gains may be capped around $0.8650, given that previous attempts at that level have ended in failure this week, while resistance was building around $0.8640.
New Zealand government bond prices rose, showing limited initial reaction to the RBNZ announcement and tracking a rally in U.S. Treasuries. Yields slipped roughly 4.5 basis points lower across the curve.
(Reporting by Naomi Tajitsu)