KEY POINTS:
The melt-down of New Zealand dollar gathered momentum today as the kiwi took its biggest tumble in 21 years.
It first crashed under the psychological barrier of US70c and within hours fell to a session low of US68.23c - three US cents below where it started the session. It rebounded to US69.02c at the local close.
Today's fall, also similar in size to one in June 1998, came after a hefty one and a half cent dive yesterday.
The kiwi has dropped over 10 per cent in a week in one of most dramatic slumps since it was floated 22 years ago. It has now plunged over 15 per cent since hitting a post-float peak of US81.1c on July 24.
In an unusual move, the Reserve Bank issued a statement saying it was monitoring developments in financial markets, but that was not seen as a signal it was about to ease its tough monetary stance.
Dealers said the selling had momentum from hedge funds, computer traders and Japanese retail investors.
Equity markets continued to plunge, with the local market down 1.5 per cent and the Australian market down 5 per cent and this added to the kiwi's woes as investors fled risk.
BNZ currency strategist Danica Hampton said the kiwi could continue its slide with $3.6 billion of eurokiwi and uridashi bonds - foreign held securities denominated in New Zealand dollars - due to mature this month. The crunch could come on Monday when $2.5 billion was due to mature.
Although the selling could not continue at today's pace, the market had momentum. With US70c having been convincingly broken, investors would be eyeing up the year-low of US67.50c set in March.
An Auckland dealer said the selling had been relentless.
"I don't think any of us thought we'd be here anywhere near as quickly as this."
He believed if the "mess" created by the crisis in the US subprime mortgage market continued, the US Federal Reserve might have to ease rates. If that happened, other central banks including the Reserve Bank would follow suit.
However, Ms Hampton disagreed, saying the RB and other central banks were not interested in bailing out financial institutions from poor credit decisions.
"Their interest is only about providing liquidity to the market. It's about the quantity of money, not the price. All of the cash that has been pumped in by central banks has been at or above the target cash rate.
"They are not easing monetary policy."
She said the US Federal Reserve had made it clear in the past that it did not respond to asset bubbles, whether shares or houses.
In the morning, Finance Minister Michael Cullen appeared content with the kiwi's plunge, telling a business gathering the kiwi was still over-valued..
"The dollar is still well above a position justified by medium-term fundamentals and has been for a long time," he told the business group.
Dr Cullen and the Reserve Bank had frequently said over the past two years that the NZ dollar was unjustifiably and exceptionally high given economic fundamental.
The Reserve Bank, which intervened in the currency markets for the first time in June, is sitting on a very large profit from that action. It revealed this month it spent $700m in June in three raids and it is quite probable it intervened again profitably in July and August.
In today's statement, the bank said it was closely monitoring the impact on the local market but the situation had so far remained calm.
"While some additional pressures have been present, we believe the level of cash within the banking system is adequate and markets continue to function satisfactorily," deputy governor Grant Spencer said.
"The bank will continue to monitor conditions closely and stands ready to provide additional liquidity should that be necessary."
Equity markets were further spooked when shares in the largest US mortgage lender, Countrywide Financial, plunged 13 per cent.
Concerns about the health of the mortgage lending business and its effect on wider credit markets heightened after shares of Countrywide dived on a brokerage downgrade and rumours it was having trouble raising money.
The New Zealand dollar's fall was as dramatic against other currencies. It dropped more than four yen to 79.04 against the Japanese currency while against the Australian dollar, which was also pummelled against the greenback, it ended on A85.60c from 86.65c.
The trade-weighted index dropped 3.3 per cent to 67.04.
Reuters currency rates:
5pm today 5pm yesterday
NZ dlr/US dlr US69.02c US71.65c
NZ dlr/Aust dlr A85.60c A86.65c
NZ dlr/euro 0.5157 0.5309
NZ dlr/yen 79.04 84.01
NZ dlr/stg 34.74p 36.01p
NZ TWI 67.04 69.35
Australian dollar US80.65c US82.84c
Euro/US dollar 1.3426 1.3507
US dollar/yen 116.03 117.18
- NZPA
