KEY POINTS:
Whether it retests last year's post-float high of US81.1c or retreats from current levels, the buoyant New Zealand dollar's near term fortunes largely depend on what happens next in troubled US markets, say local currency watchers.
This week, Australian economist Clifford Bennett forecast a significant move higher for the kiwi, driven by the enormous yield differential that has opened up between it and the greenback, thanks to the US Federal Reserve's big recent interest rate cuts.
Bennett tipped US83c within days and said a surge up towards US90c was a possibility this year. The local currency's highest point against the greenback since it was floated almost a quarter of a century ago was US81.1c hit in July last year.
However, ANZ head of markets John Body believed Bennett's forecasts were overly high.
Nevertheless, given the relative strength of the New Zealand economy and current weakness in the US, "it's hard to see anything but a broadening of the interest rate differential between New Zealand and the US, and a continued inpouring of money, so I think a breakback above US80c is inevitable really".
"I think US82c-US83c is a realistic target, probably not over the next week or so but over the next two to three months."
In a pattern seen repeatedly since the sub-prime-related issues blew up in the US last year, the New Zealand dollar has dipped when US sharemarkets lose ground or when fresh reports of credit market woes emerge.
Such events have resulted in waves of risk aversion by investors in other markets including foreign exchange, and the New Zealand dollar is generally regarded as a risky bet.
Body believed risk aversion would continue to determine the pace and direction of the kiwi's moves.
"In a world of high levels of risk aversion, there will be people who look to sell kiwi, but if risk aversion dies down and we get a raft of tranquillity in the equity markets, a gradual array of yield buyers will chip away at it (the New Zealand dollar) and it will just grind its way up 30, 40 or 50 points a week and follow the aussie up."
BNZ currency strategist Danica Hampton said there was currently "a tug of war between yield differentials, risk aversion and global growth concerns going on".
"Some weeks the yield differential will win out and other weeks we will see this risk aversion, global growth fears play out.
"That tug of war is likely to continue for some time while there is uncertainty about what's going on in the global environment.
"It's naive to think that it's just an interest rate differential story.
"Interest rates do drive currencies, but really interest rate is reflective of a relative growth differential ... when the interest rate story reflects the growth story then they drive currencies.
"When you overlay the interest rate story with the fact that New Zealand's economic growth seems to have peaked and is slowing, things look like a less attractive investment in New Zealand and that helps take some of the gloss off the kiwi."
She believed the dollar was at the top of its recent range, "and we are overdue for a bit of a pullback".
"That will probably be triggered by some sort of global event whether it be more trouble for bond insurers or some sort of credit-related event."
Hampton expected such a pullback to take the kiwi down to the US74c level or US72c "if it's really bad news".
The kiwi dollar hit yet another six month high of US79.68c early yesterday, being dragged higher by the aussie ahead of a widely expected Reserve Bank of Australia interest rate increase, but eased back to close on US79.21c.
