Australia, NZ dollars join risk rally, but oil remains a danger

By Wayne Cole

SYDNEY, April 1 (Reuters) - The Australian and New Zealand dollars were back from the brink on Wednesday as investors clung to hopes for some progress toward ending the Gulf war, sparking an equities rally and boosting appetite for risk assets.

The Aussie firmed 0.2% to $0.6915 AUD=D3, having bounced from a 10-week trough of $0.6834 overnight. A break above $0.6945 was needed to improve a bearish technical background.

The kiwi dollar steadied at $0.5746 NZD=D3, after also edging up from a 10-week low of $0.5698 overnight. It needs to get above $0.5765 to be on steadier footing.

President Donald Trump on Tuesday said the United States could end its military attacks on Iran within two to three weeks, and plans to address the nation on the war later on Wednesday.

That sparked speculation he would announce some sort of wind-down in the conflict, even as the U.S. navy is reportedly dispatching another carrier group to the region.

Yet oil prices were rising anew on worries the U.S. could withdraw without securing the Strait of Hormuz, effectively leaving the world's most critical oil chokepoint under Iranian control.

"The conflict still means that inflation stays higher for longer as prices take time to normalise from the shock but also because there has been some permanent damage to energy facilities," said Diana Mousina, deputy chief economist at AMP.

"For Australia it means more interest rate increases, as Australian inflation was already too high before the conflict started," she added. "We are expecting another rise in May, and see a risk of another hike in the second half of the year."

The Reserve Bank of Australia lifted rates to 4.10% in March and minutes of the meeting showed the coming energy shock loomed large in discussions.

Markets imply around a 65% chance the RBA could hike again at its next meeting on May 5, but have lowered the expected peak to 4.66% from 4.75% early in the week. 0#AUDIRPR

Investors have also pared back the probability of an early hike in the Reserve Bank of New Zealand's 2.25% cash rate.

The RBNZ's next meeting is on April 8 and is considered certain to hold steady while citing the uncertainty caused by the war. A move in May is now implied at 25%, down from 60% at the end of last week, while July is at 68% from being almost fully priced. 0#NZDIRPR