The New Zealand dollar plummeted below 84 US cents and stocks are likely to follow a slump on Wall Street and in Europe amid speculation the European sovereign debt crisis may spread to core euro zone countries, forcing central banks to provide more support.
Global equity markets bore the brunt of a massive reversal in investors' appetite for riskier assets, which was triggered when the European Central Bank dashed hopes that it would begin buying Italian and Spanish bonds in a bid to prevent yields rising to unsustainable levels. Instead the bank said would resume sovereign bond purchases from the peripheral euro zone states, such as Ireland and Portugal.
On Wall Street, the Standard & Poor's 500 Index tumbled 4.8 per cent to 1,200.07, its lowest level since November 30, 2010. In Europe, the Stoxx 600 Index fell 3.5 per cent to a one-year low of 243.16, and the 19-commodity Thompson Reuters Jefferies CRB Index fell 2.8 per cent to 327.97.
"When you look at the New Zealand dollar versus the US dollar, on any metric it's over-valued - certainly in the medium-term," said Stephen Toplis, head of research at Bank of New Zealand. "What we're seeing is what it might take to see the New Zealand dollar collapse, and that's a collapse in global economic activity."
So-called safe haven assets saw renewed buying, with reports that New York banks were charging investors to place deposits. Demand for government bonds spiked, with yields on US two-year treasuries at an all-time low, US 10-year treasuries 15 basis lower from yesterday, and yields on Australian three-year bonds trading 30 basis points lower.
