By Wayne Cole
SYDNEY, July 18 (Reuters) - The Australian dollar surged to two-year peaks versus a crumbling U.S. dollar on Tuesday, spurred by an upbeat economic outlook from the country's central bank that led investors to narrow the odds on a hike in interest rates.
The Aussie climbed 1 percent to $0.7884 AUD=D4 , the highest since May 2015 and well above last year's top of $0.7836. Analysts said the next chart target was the $0.8000 level and the 200-week moving average of $0.8018.
The New Zealand dollar was having a wild session, first diving on surprisingly soft domestic inflation data before rebounding as its U.S. counterpart took a spill.
The kiwi was last at $0.7332 NZD=D4 , having recovered all the way from an early $0.7261 low.
The sudden retreat in the U.S. dollar was linked in part to signs Republicans might fail in passing a long-awaited healthcare bill, threatening President Donald trump's entire policy agenda. Aussie got an extra boost from minutes of the Reserve Bank of Australia's (RBA) last policy meeting which painted a more optimistic view on the economic outlook. policy board also discussed estimates of the neutral level of interest rates - that which neither stimulates the economy nor retards it. This was put at around 3.5 percent, down from 5 percent in 2007 but it still implied the current setting or rates was expansionary.
"Today's minutes seemed to have a more positive tone overall with the RBA acknowledging recent strength in the labour market and the generally positive flow of data," said CBA economist Kristina Clifton.
"Nonetheless we don't think rate rises are back on the cards yet and we would need to see an upgrade to inflation and wages forecasts to change our view of policy on hold until well into next year."
Investors reacted by narrowing the odds on a future rise in the 1.5 percent cash rate, with interbank futures 0#YIB: implying around a 20 percent chance of a move by December.
Yields on three-year government bonds climbed 9 basis points to a four-month high of 2.12 percent AU3YT=RR while the futures contract fell 9 ticks to 97.910 YTTc1 . Futures on the 10-year bond YTCc1 dipped 3 ticks to 97.2400.
In New Zealand, bond yields < 0#NZTSY= went the other way as a soft inflation reading was taken as reducing the risk of a hike there anytime soon. inflation figures should lead to a substantial rethink in financial markets, which have been persistently pricing a hike by mid-2018," said Westpac economist Michael Gordon.
"While inflation has come off its lows, the economy is not in danger of overheating, and we see no need for rate hikes this year or next year."