SYDNEY, July 10 (Reuters) - The New Zealand dollar fell on Wednesday while bonds rallied as markets sharply ramped up bets for a rate cut as early as August after the Reserve Bank of New Zealand opened the door to possible easing if inflation slows as desired.
The RBNZ held interest rates steady at 5.5%. With policymakers expecting inflation to return to the target range in the second half of the year, it added "the extent of this restraint (in policy) will be tempered over time consistent with the expected decline in inflation pressures".
The kiwi dollar fell 0.7% to $0.6083, having held mostly steady overnight. It has support at $0.6048, a 1-1/2-month low.
Two-year swap rates tumbled 11 basis points to a six-month low of 4.6850%, and investors moved to bet a rate cut in August is now a 58% probability.
A move in October has been more than fully priced in, compared with just 66% before the rate decision. For all of 2024, swaps imply a total of 45 basis points of easing.
Bonds rallied, with two-year New Zealand government bond yields falling 11 basis points to 4.665%, a three-month low.
"Against expectations that the brief statement would repeat the key messages from May, it was less hawkish," said Imre Speizer, head of NZ strategy at Westpac.
The RBNZ news also sent the kiwi tumbling against the Australian dollar, which has benefitted from the risk of another rate rise from the Reserve Bank of Australia.
The Aussie surged 0.8% to NZ$1.1089, its highest since October 2022.
Against the greenback, the Australian dollar was little changed at $0.6740.
The Australian dollar has been steadily rising against the Japanese yen, thanks to demand to use the low-yielding yen to fund investments in higher-yielding currencies.
It touched 108.88 yen on Wednesday, the strongest in 33 years. (Reporting by Stella Qiu; Editing by Jacqueline Wong)
