KEY POINTS:
The dollar could hit US85c, currency strategists say, continuing its ascent on the prospect of higher interest rates and market jitters over American sub-prime mortgage problems.
The dollar briefly hit yet another fresh post-float high of US81c yesterday, just a day after breaking through the psychological US80c mark.
It closed at US80.87c.
"There's more to come," said Royal Bank of Canada currency strategist Sue Trinh.
"Our target is still US82c but the risk is all to the upside. I wouldn't rule out a move to US85c."
Westpac currency strategist Michael Gordon said US81c had until recently been the bank's target for the year's end.
The dollar's level was still consistent with Westpac's view that it would remain above US80c for the remainder of the year.
"But given it's a volatile currency, you can't rule out anything between US75c and US85c between now and then."
With the Reserve Bank now widely expected to lift the official cash rate to 8.25 per cent tomorrow, further increasing the dollar's appeal to international investors, interest rate differentials remain the currency's key driver.
While Bank of New Zealand currency strategist Danica Hampton said a rate hike tomorrow was necessary to justify the dollar's level, Trinh said the markets had only about a 70 per cent likelihood of a Reserve Bank rate increase this week.
"So the risk is that if forecasts are realised that will boost the kiwi further."
Trinh also pointed to the US dollar, which was weakening on fresh concerns about the United States' sub-prime mortgage market.
Increasing home loan defaults and repossessions associated with sub-prime lending have sparked fears of a slowdown in the economy and further fall-out in the financial sector, where there has been widespread speculation in bonds backed by such loans.
This week, the US dollar touched an all-time low against the euro, trading at US$1.38 at one stage on Monday before rallying slightly.
Gordon said the sub-prime concerns were being treated as mostly a US issue. "Whenever there is news on it, it leads to selling of the US dollar."
However, there was a risk that if financial institutions in other countries proved to have significant exposure to the problem, that could lead to a wave of "risk aversion" and a rapid unwinding of the carry trade positions that had lent strong support to high-yielding currencies like the kiwi.
Facing increasing calls to do something about the currency, Finance Minister Michael Cullen said gains this week were a US dollar story.
"We really haven't changed much against currencies like the Australian and so on over that period of time and nothing we can do can affect the US dollar in coming down."
The kiwi is also continuing to make ground against the yen, rising 34 per cent during the last 12 months compared with 31 per cent against the greenback.
With the yen closing yesterday at 97.50 to the dollar, "we're looking for a move to 103 at least, mainly due to yen weakness and kiwi strength", said Trinh.
Closing at A91.43c, the kiwi is also moving higher against the aussie in what Gordon said was a relative rate story ahead of the RBNZ rate call.
Trading Places
* The dollar hit US81c yesterday, having gained more than a cent in 24 hours.
* Currency strategists say US85c is now a strong possibility.
* The kiwi's rise has been fuelled by expectations of a Reserve Bank rate increase tomorrow and US dollar weakness associated with sub-prime mortgage market woes.