KEY POINTS:
The New Zealand dollar's bounce accelerated over the weekend as equity markets firmed, but market analysts warned the credit market woes that sent the local currency tumbling are not over.
The kiwi dollar closed at US72.27c yesterday after hitting a high during the session of US72.74c - 2.5 per cent above Friday night's close of US70.90c, and 9 per cent above the five month low of US66.70c plumbed during the market rout on August 17.
The local currency's progress came as Wall Street rallied, restoring some confidence to currency markets.
"The world's kind of calmed down a little bit and people want to get back into carry trades and the kiwi's yield's proven attractive again," said ANZ's John Body.
However, he believed the market was writing off the credit crunch too quickly.
"The issues in terms of sub-prime mortgages and some of the less strong parts of the finance sector will come back to haunt the market.
"I don't really believe this is the end of it by any stretch of the imagination and I think the kiwi's starting to get extended. I'd favour selling kiwi here rather than buying it."
While some commentators credited an increased Fonterra payout to dairy farmers with helping fuel the kiwi's latest gains, Body said that had been widely anticipated and even with the bigger payout, fair value for the local currency was in the mid US sixties.
"The kiwi looks overvalued and the global risk aversion trade will come back on so we'll see the kiwi back into the high sixties."
BNZ currency strategist Danica Hampton said while recent moves suggested further short term gains: "We are mindful that investor confidence is fickle, and any negative credit news could quickly lead to a souring in investor risk appetite."
"In this respect, we still think it is a little premature to conclude that the worst of the credit market turbulence is behind us."
Body pointed to ANZ's commentary last week which anticipated the Reserve Bank would move to cut interest rates faster than expected as the risks for the local economy, including the impact of finance company failures, were now building.
THE KIWI
* Closed at US72.27c yesterday.
* Hit US72.74c - 2.5 per cent above Friday night's close.
* Was 9 per cent above the five month low of US66.70c.