"It shows us how much [world markets] can push our currency around, over and above our actual economic growth," Smalley said.
"There's been a number of commentators who've said our [high] currency didn't reflect our underlying performance of the New Zealand economy. It's very susceptible to moves in sentiment and if there's [concerns over risk] - whammo, down we go," he said.
Westpac's currency strategist Imre Speizer agreed and said the dollar fell despite good economic signals domestically.
"Global risk appetite trumps everything else. We had a reasonably good employment report on Thursday and it was ignored simply because of the global developments. When risk appetite falls, everything of a risky nature is sold and the kiwi just gets bundled up with the rest and gets sold severely."
Speizer said if the global situation worsened, traders would continue to buy up US currency, putting more downward pressure on the kiwi.
Smalley said it was ironic that even if the American economy contracted, its dollar would still strengthen as it remained the default currency because of its size.
Asia-Pacific Risk Management's Roger Kerr said while the New Zealand dollar fell with global markets, some of this week's drop was a natural "unwinding" after an agreement on the debt ceiling in the US.
"The jump up from US83c to US88c was the Kiwi dollar decoupled from some of its drivers like commodity prices and it went up on its own as money was parked here. Some of the selling this week has been unwinding from last week," Kerr said.
The dollar's downward run kicked off on Thursday afternoon as Japan bought up the greenback to devalue the yen and stem fears the country's high currency - which this week neared a post-World War II record - would kill economic recovery.
It came as discussions in the European Central Bank revealed deep divisions within the eurozone over how to handle a debt crisis that has forced Greece, Ireland and Portugal to seek financial rescues.
Investors worry that Italy and Spain, the eurozone's third and fourth-biggest economies, could be next.
Belying a sense of crisis, many of Europe's policymakers are still on their summer vacations, although EU Economic and Monetary Affairs Commissioner Olli Rehn broke away from his holiday to return to Brussels.
"The biggest issue that the European banks have is that they are undercapitalised," said Daniel Alpert, managing partner at Westwood Capital, a New York-based investment bank. "While US banks don't have a tremendous exposure to the sovereign debt in Europe, the bottom-line issue is these banks in Europe are important parts of the worldwide financial system."
In a speech, Italy's Berlusconi said financial markets weren't estimating risk correctly and that Italy was "up to the task" of tackling the debt crisis. Earlier he'd said that he didn't think the current market turmoil would get worse.
- Additional reporting: Agencies
