By Swati Pandey
SYDNEY, Aug 9 (Reuters) - The New Zealand dollar fell sharply on Thursday after the country's central bank surprised the market by committing to holding rates at record lows until the end of 2020 as economic growth figures disappointed.
The New Zealand dollar NZD=D3 sank as deep as $0.6698, the lowest since early July. A fall below $0.6688 would put the currency at its weakest since May 2016.
Against the Australian dollar AUDNZD=R , the kiwi dropped to an eight-month trough of NZ$1.1096.
The losses came after the Reserve Bank of New Zealand (RBNZ) said it will keep rates at 1.75 percent through 2019 and into 2020 as it cut next year's forecasts for gross domestic product growth to 2.6 percent from 3.1 percent. outlook was more dovish than the RBNZ's previous guidance when it predicted a small chance of a hike by September of next year.
"The RBNZ this morning delivered a dovish surprise to markets," said Imre Speizer, head of NZ Strategy at Westpac.
"Markets responded to the dovish signal ... There's scope for these reactions to be extended during the day, since the risks of a slower economy is a narrative which has only recently taken hold in markets but was confirmed by the RBNZ today."
Across the Tasman Sea, the Australian dollar AUD=D3 was slightly firmer, hovering around one-week highs at $0.7437.
Like its New Zealand counterpart, the Reserve Bank of Australia (RBA) is also widely expected to keep rates at record lows for some time yet as it awaits quickening inflation and a drop in the jobless rate.
Current market expectations, however, are for cash rates to rise by the end of 2019.
The RBA will issue its latest economic forecasts on Friday.
In a speech on Wednesday, RBA Governor Philip Lowe provided a taster on the bank's outlook, noting inflation will not pick up to the mid-point of its 2-3 percent target band before 2020.
Meanwhile, unemployment is seen easing to 5 percent "at some point over the next few years" from 5.4 percent currently. so, Lowe sounded more upbeat about the economy and flagged faster-than-expected progress in lifting inflation and reducing unemployment could mean earlier an rate hike.
"One observation post RBNZ is the juxtaposition of RBA's Lowe indicating yesterday that the Bank is apt to lift rates ahead of inflation even hitting the mid-point of its target, while RBNZ Governor Adrian Orr has made clear policy is expected to be on hold at least through 2019 and that higher headline inflation is to be both looked through and/or welcome," said Rodrigo Catril, analyst at National Australia Bank.
"Relative rates are only one component of the AUD/NZD equation, but with other key drivers - relative business conditions and relative commodity prices - also supportive of the Australian dollar of late, there appears scope for AUD/NZD to make further progress above 1.10." (Editing by G Crosse)