SINGAPORE, Jan 25 (Reuters) - The Australian dollar surged to a more than five-month high on Wednesday after inflation data came in hotter than expected, bolstering the case for further rate increases, while the euro gained on optimism over the euro zone economic outlook.
The Aussie jumped more than 0.8% to $0.7108, its highest level since August, after a shock spike in inflation to a 33-year high last quarter spurred bets that the Reserve Bank of Australia (RBA) would need to continue raising rates.
"Today's report should quickly eradicate hopes of an RBA pause in February," said Matt Simpson, senior market analyst at City Index.
"With higher interest likely coming for Australia, China's reopening and higher base commodity prices, the Australian dollar could be a tough currency to bet against."
Meanwhile, the kiwi slid nearly 0.6% to $0.6469 earlier in the session and last bought $0.6485, after New Zealand's annual inflation of 7.2% in the fourth quarter came in below its central bank's 7.5% forecast.
"We think we've seen the worst of inflation now, we think inflation has peaked," said Jarrod Kerr, chief economist at Kiwibank.
"We're expecting the cash rate in New Zealand to peak at 5%, not 5.5%, which is what the Reserve Bank is telling us they're going to do," he said, referring to the New Zealand central bank.
In other currencies, the euro rose 0.05% to $1.0894, edging toward Monday's nine-month high of $1.0927, as a surprisingly resilient euro zone economy and hawkish rhetoric from European Central Bank (ECB) policymakers supported the single currency.
Data on Tuesday showed that euro zone business activity made a surprise return to modest growth in January, indicating the downturn in the bloc may not be as deep as feared.
Expectations of further rate increases by the ECB also aided sentiment. Policymakers are committed to taming inflation but are split on the size of moves beyond February's likely half-a-percentage point increase.
In contrast, a gloomier outlook is unfolding in the United States as signs of an economic slowdown after aggressive Federal Reserve rate increases last year, are starting to appear.
U.S. business activity contracted for the seventh straight month in January, though the downturn moderated across both the manufacturing and services sectors for the first time since September.
Against a basket of currencies, the U.S. dollar index eked out a 0.02% gain to 101.93, though not far from last week's nearly eight-month low of 101.51.
"(The data) just confirms that for one, the resilience in Europe ... and the challenges they've had in terms of energy, have not been as detrimental as some had expected, whilst at the same time, the slowdown in the U.S., in terms of activity, looks to be broadening," said Rodrigo Catril, a currency strategist at National Australia Bank.
Sterling slipped 0.15% to $1.2322, while the Japanese yen last bought 130.53 per dollar.
Prime Minister Fumio Kishida said he would make a decision on the next Bank of Japan (BOJ) governor while watching the economic trends. Current BOJ governor Haruhiko Kuroda's term ends in April.
(Reporting by Rae Wee; Editing by Himani Sarkar)
