(Updates with NZ$ reaction to latest election poll)
By Swati Pandey
SYDNEY, Sept 20 (Reuters) - The New Zealand dollar leapt to a 1-1/2 month high on Wednesday after an opinion poll showed the country's ruling National Party had regained a wide lead over the opposition just three days before a nail-biting general election.
Support for the National Party rose 6 points to 46 percent while that for Labour slipped seven points to 37 percent, according to One News-Colmar Brunton opinion. kiwi dollar NZD=D4 jumped to $0.7416, a level not seen since Aug. 7.
The currency has been volatile after the opposition Labour party announced Jacinda Ardern as a challenger to Prime Minister Bill English. The race has tightened since, although investors were still uncertain which party would lead the next government.
In recent weeks, the kiwi has stumbled when polls indicated a win for Labour, reflecting its promise of tougher fiscal and immigration reform which would hurt economic growth.
"If National were to sweep up the most seats, the NZ dollar may enjoy a bit of a relief rally," said Paul Dales, chief economist at Capital Economics.
However, any move is likely to be small and short-lived for two reasons: "First, the polls suggest that either outcome would not be a big surprise. Second, if Labour wins, the markets may wait to see if Ardern can turn talk into action," Dales added.
Across the Tasman Sea, the Australian dollar held above the key level of 80 cents on Wednesday as yields on government bonds hit their highest since late 2015, while more domestic banks predicted the central bank will hike rates next year.
Australian government bond prices have fallen sharply in the past week, outpacing even the drop in U.S. Treasuries. As a result, the spread between local two-year yields AU2YT=RR and those in the United States US2YT=RR has reached its widest since February.
The move is in line with an increase in yields seen in Canada and Britain as central banks there turn hawkish.
Higher yields have supported the Australian dollar AUD=D4 , which was up at $0.8041 on Tuesday, after rallying to a 2-1/2 year peak of $0.8125 earlier this month.
While the Reserve Bank of Australia (RBA) is wedded to its neutral stance on policy, analysts at ANZ and National Australia Bank expect it to lift rates by 50 basis points in 2018.
The futures market 0#YIB: implies a 74 percent chance of a rate hike in May 2018, with a 25 basis point increase by August fully priced in.
ANZ's view "reflects an outlook for growth that is a touch more positive," it said a note to clients. "Our confidence in looking for rate hikes in 2018 is boosted by the hawkish shift in the RBA's language."
For 2018, ANZ has forecast economic growth of 2.9 percent, then 3 percent in 2019, with the unemployment rate declining to 5.3 percent by the end of next year from 5.6 percent now. (Editing by Richard Borsuk and Kim Coghill)