The New Zealand dollar tumbled on Thursday after the country’s central bank cut its benchmark interest rate and said it may ease policy further, especially if the South Pacific nation’s economy is weakened by a potentially sharper downturn in China.

The kiwi fell 2.0 per cent to $0.6275. It slumped to a low of $0.6256 at one point, down from $0.6405 in late US trading on Wednesday.

The Reserve Bank of New Zealand (RBNZ) has cut its official cash rate by 25 basis points to 2.75 per cent as widely expected amid a sharp fall in export prices and a slowdown in earthquake reconstruction.

RBNZ Governor Graeme Wheeler said a big slowdown in China’s economy could have a negative impact on New Zealand, highlighting growing global fears about the risk of a hard landing in China.

The Australian dollar, often seen as a proxy on China because of Australia’s dependency on resource exports to China, fell to as low as $0.6947, not far from a six-year low of $0.6892 set on Monday.

The Aussie later trimmed its losses after Australia's jobs data came in better than expected. It last traded at $0.6997, down 0.3 per cent on the day.

“The stronger employment number that came out is adding support to the Aussie right now, but it’s going to be a tough grind because a lot of the Aussie traders are primarily focused on the external factors, like the China markets,’’ said Stephen Innes, senior trader for OANDA in Singapore.’

China’s consumer inflation

Data on Thursday showed that while China’s consumer inflation in August edged up more than expected from a year earlier, producer prices fell at the fastest rate in six years, signalling stubborn deflation risks in the economy.

S&P credit rating

Also potentially damaging the Aussie, Standard & Poor’s stripped Brazil of its investment-grade credit rating late on Wednesday, while keeping the outlook negative.

Because the Brazilian real hardly trades in Asian time zone, some investors sell the Aussie for hedging as the two currencies share similar traits, such as close links to commodity and high yields.

Moves in other major currencies were more subdued.

Against the yen, the dollar eased 0.1 per cent to 120.42 yen, having stepped back from one-week high of 121.20 yen hit on Wednesday. The euro was little changed at $1.1210.

Fed policy meet

Uncertainty over whether the US Federal Reserve will raise rates at its policy meeting on September 16-17 and concerns about China are keeping investors on tenterhooks.

Data on Wednesday showed US job openings surged to a record high in July, the latest signal of an increasingly tight labour market that could push the Federal Reserve closer to raising interest rates.

Yet, many market players suspect recent volatility in financial markets is likely to keep the Fed from raising rates in September.

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