By Cecile Lefort
SYDNEY/WELLINGTON, Jan 28 (Reuters) - The New Zealand dollar dropped one U.S. cent on Thursday after the country's central bank signalled more interest rate cuts due to stubbornly low inflation at home and worries about global economic growth.
The New Zealand dollar NZD=D4 skidded to $0.6437 from $0.6526, pulling closer to a four-month trough of $0.6348 touched last week. A break below that level will target the September low of $0.6235.
Much of the damage came after the Reserve Bank of New Zealand (RBNZ) kept rates on hold at 2.5 percent but delivered an easing bias just two months after suggesting that it would not cut rates further.
"The RBNZ said more easing may be needed over the coming year as inflation targets will take longer to reach with many risks around the outlook," said Stuart Ive, private client manager for OM Financial.
Markets have already priced in a quarter-point easing by mid-year, but analysts say a move to 2.0 percent is on the horizon.
"We had rate cuts pencilled in for March and June, and this statement only supports that call," said Su-Lin Ong, a senior economist at RBC Capital Markets, adding the dovish tone was also aimed to keep downward pressure on the New Zealand dollar.
The kiwi has dropped 5.5 percent this year but remained well above a trough of under 62 cents tested in August.
Also undermining the kiwi was a downgrade of milk price forecasts by dairy giant Fonterra. recently, dairy was the backbone of New Zealand's economy, representing around 25 percent of exports, but prices have tumbled by more than half in the last two years, hurt by China's economic slowdown and global oversupply.
The kiwi skidded more than 1-1/2-cent against its Aussie neighbour, AUDNZD=R which jumped to its highest since early December at NZ$1.0934.
All that buying helped support the Australian dollar against its U.S. counterpart during a choppy session. It was steady at $0.7030 AUD=D4 , having gained 0.3 percent on Wednesday.
It touched a seven-year trough of $0.6828 last week, and remains vulnerable to slowing growth in China and diverging interest rate policies.
The U.S. Federal Reserve kept interest rates unchanged as expected and left all options open including a hike at the next meeting in March.
The Aussie held gains against the pound which skidded to a seven-month trough of A$2.0131 GBPAUD=R on Wednesday on growing expectations of easing by the Bank of England. It was last at A$2.0253.
New Zealand government bonds 0#NZTSY= were mixed, with yields a touch lower.
Australian government bond futures were subdued, with the three-year bond contract YTTc1 off two ticks at 98.080. The 10-year contract YTCc1 eased one tick to 97.3150, while the 20-year contract YXXc1 added one tick to 96.8300. (Editing by Ryan Woo)