The New Zealand dollar pared gains against its Australian counterpart after the Reserve Bank of Australia cut its key interest rate without indicating any scope for further cuts.
The kiwi fell to 87.47 Australian cents at 5pm in Wellington from 87.72 cents immediately before the announcement and 87.53 cents on Monday.
The NZ currency traded at 78.51 US cents from 78.05 cents at 8am and 77.71 cents on Monday.
The RBA cut the target cash rate a quarter point to 2.5 per cent to help stoke a slowing economy.
Governor Glenn Stevens said the economy has been below trend in the past year, and while a weaker Australian dollar has helped, the currency is still over-valued.
Whereas previously he has indicated whether there's scope for another cut, he didn't offer any guidance in Tuesday's statement.
"The market was a bit short and caught - Aussie rates came up a little bit as people had more cuts priced in," said Chris Tennent-Brown, FX economist at Commonwealth Bank of Australia in Sydney.
"That's what's driving the Aussie a little higher."
The kiwi recovered after being sold off on Monday amid a food contamination scare at Fonterra, New Zealand's biggest company. Dairy products account for about a quarter of New Zealand's exports.
Finance Minister Bill English told parliament he expects the local economy will only suffer a small hit from the food scare.
Mr Tennent-Brown said Wednesday's GlobalDairyTrade auction will give a good steer on the market's reaction to the news.
The kiwi rose to 77.11 yen at 5pm in Wellington from 76.76 yen on Monday and to 59.18 euro cents from 58.54 cents.
The trade-weighted index advanced to 74.37 from 73.81.
