By Charlotte Greenfield
WELLINGTON, July 5 (Reuters) - The New Zealand dollar is soaring as markets pull back their expectations for further central bank easing, making its interest rate differential that much more eye-catching in the face of global uncertainty.
New Zealand's benchmark interest rate of 2.25 percent is the highest among leading developed-country currencies. Money markets are now pricing in only a 53 percent chance of easing at August's rate review, down from 80 percent just over a week ago.
The New Zealand dollar, dubbed the kiwi after New Zealand's emblematic flightless bird, is trading at 0.7205 NZD=D4 , up around 7 percent since the beginning of the year.
"The mantra seems to be, 'if in doubt buy kiwi' again. The market's love affair with yield and all-things-not-Europe remains supportive," said ANZ Senior Rates Strategist David Croy.
Caution in other parts of the world brought on by Britain's vote to quit the European Union has spurred the hunt for higher yields and relative safety.
The U.S. dollar, meanwhile, has been hurt by significantly reduced expectations of the Federal Reserve raising rates this year in the wake of Brexit. yield on New Zealand's 10-year government bond is hovering around 2.33 percent versus 1.44 percent on 10-year U.S. Treasury notes.
Ongoing strength in New Zealand's domestic economy, underscored on Tuesday by a rebound in business confidence on improving commodity prices and more evidence of a hot housing market, means the kiwi looks to be outpacing other commodity currencies _- including the Australian dollar. Australia gripped by political uncertainty following a cliffhanger election and the possibility of losing its AAA credit rating, markets had priced in a 60 percent likelihood of a Reserve Bank of Australia (RBA) rate cut in August and a 100 percent chance by November. the prospect of rates remaining on hold is keeping the kiwi buoyant, the high New Zealand dollar could ironically end up swaying the Reserve Bank of New Zealand to cut.
The central bank held its overnight rate steady in June but said if the kiwi kept pushing higher on a trade-weighed index basis more cuts could be needed.
The New Zealand dollar's trade-weighted index was at 76.8 NZDTWIFIX=NZFA versus the RBNZ's forecast of 72.6 for the June quarter.
However, "even if both the Reserve Bank of Australia and the RNBZ were to cut rates in August, New Zealand will still offer 50 basis points more in yield," said Stuart Ive, private client manager for OM Financial.