WELLINGTON (Dow Jones)--The New Zealand dollar was trading lower late Thursday as the Australian dollar fell sharply on weaker commodity prices and an unwind of rate increases, giving up whatever losses it had recouped following the release of the New Zealand budget. The Australian dollar fell sharply late, taking with it the New Zealand dollar, said Mike Jones, a forex strategist at BNZ. The New Zealand Dollar had risen to US$0.6853 after the budget from US$0.6798. "The budget, in light of the focus on sovereign debt issues in Europe, shows New Zealand as a stand-out performer," says BNZ Bank NZ Chief Dealer Mike Symonds. "The deficit is forecast to peak at 4.2% of GDP. We are pretty much the envy of the Western World." The initial reaction to the budget had been positive, he said. The New Zealand Dollar did lose some ground following a Dow Jones Newswires report that ratings agency Fitch would retain its negative rating outlook on the country. Still, the New Zealand Dollar also rose steadily against the Australian dollar on the back of the budget. The Kiwi rose to AUD$0.8131 from AUD$0.8079. The rise was partly due to the NZ budget indicating more monetary policy would be needed to contain inflation, Imre Speizer, a markets strategist at Westpac, said. "Around 2011, you are likely to get a big fiscal stimulus to the economy and one of the things it will do is pop up inflation, which should be temporary. Because of that, monetary policy has more work to do in the early part of its tightening cycle." He said this supported consensus forecast that the Reserve Bank of New Zealand would begin interest rate hikes in June. Even so, the New Zealand budget was expected to remain a secondary influence to European sovereign debt issues and the weakness in the euro. The New Zealand dollar was likely to be more influenced by global events than the budget, as euro-zone developments remained in focus, Symonds said. The New Zealand dollar tumbled overnight to US$0.6661, its lowest since July 31, 2009, as worries about the euro zone situation sent the currency into a rapid fall. The move was no reflection on the kiwi and it was just that all currencies deemed risky were lumped into one basket, Speizer said. The New Zealand government bonds prices fell, while interest rate swaps were higher following a looser that expected budget due to the extent of the income and corporate tax cuts. The government bond programme, which had increased the bond offering for fiscal year 2011 but reduced it for the following two years would increase bond prices relative to where they might have been, a local bond trader said. A second trader added that the movements were a "typical post budget reaction" and he saw the budget as "pretty neutral." -By Lucy Craymer, Dow Jones Newswires; 64-4-471-5990; lucy.craymer@dowjones.com

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