"The central bank expects the higher terms of trade to continue to be reflected in the exchange rate, as it is currently," Bollard's statement said today.

The so-called kiwi dollar gained 9.7 percent against the U.S. dollar the past 12 months and reached a five-month high of
78.48 U.S. cents yesterday.

"The terms of trade are at a 30- or 40-year high and the central bank is starting to recognize this," said Craig Ebert, senior markets economist at Bank of New Zealand Ltd. in Wellington. "They are perhaps not as comfortable about the inflation pressure that may come from it."

Bollard said a stronger currency will deliver the benefits of the rising terms of trade to the community through more wealth and cheaper imports.

"There is increasing tolerance for a strong New Zealand dollar," Ebert said. "They seem to be saying 'if the terms of trade are that strong and are that threatening on the inflation front we will be tolerant of the currency remaining strong.'

David Fuller's view Prior to the financial crisis, New Zealand was an attractive destination for carry traders because of the yield differentials. Since 2008 the Official Cash Daily Rate has been cut from 8.25% to 2.5% and have stayed at or below 3% for nearly two years. New Zealand's strong economic performance coupled with rising inflationary pressures makes the potential for rates to begin trending upwards again a stronger likelihood.

The Australian Dollar and the New Zealand Dollar share a relatively similar long-term pattern against the US Dollar. Both entered secular downtrends in the early 1970s and turned to outperformance from 2001 as commodity prices began to recover. The $1 area was something of a psychological Rubicon for the Australian Dollar and 80¢ appears to offer a similar psychological level for the Kiwi. It has not traded above 80c since 1982 but is less than two cents away at present and the odds are better than even that it will sustain an upward break.