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The top-heavy kiwi dollar got a haircut and the sharemarket had one of its biggest falls of the year after housing fears prompted a savaging on Wall St.
The New Zealand dollar lost US2c to a low of US77.82c, before regathering some strength to US78.33c at 5pm NZT.
It was a sizeable fall compared with a 25-year high of US81.60c on Tuesday , but some dealers believed it wouldn't be down for long.
"I wouldn't be surprised if we head back up over US79c tonight," ANZ technical analyst Mark Elliott said.
The NZSX-50 index also suffered, diving 2.1 per cent or 91 points to 4234.3 at 1.51 pm, its biggest selloff since May 2003. It later partially recovered to a close of 4246, down 1.8 per cent or 79 points.
Both markets were responding to one of the worst selloffs this year on Wall St, which sliced the Dow Jones by more than 2.2 per cent.
The jitters have been prompted by continued concerns about housing loans and "credit crunch" fears.
ABN Amro Craigs dealer Matt Willis said the fundamentals of New Zealand's currency and equity market were still supportive.
"However, for various reasons today, you are going to see money heading for the door."
New Zealand was not alone. Australia's ASX-200 was down 2.5 per cent at 12.15pm NZT, while Japan's Nikkei sharemarket had fallen 2.3 per cent. The Australian dollar also lost about US2c, slumping to US86.65c against A88.48c yesterday, but was regaining momentum at US87.71c.
Both trans-Tasman currencies were sold down heavily against the yen as "carry traders" got nervous and repatriated their money to low-risk Japanese currency.
The kiwi's fortunes were compounded by yesterday's interest rate hike and comments, which some of the market has interpreted as the end of the Reserve Bank's tightening cycle.
Westpac currency strategist Michael Gordon said the kiwi dollar often dropped between 2 and 5 per cent following a perception that the central bank had ended a tightening cycle.
"What we've seen today is certainly consistent with that kind of change of perception, and with the US credit concerns on top of that, with the two forces together it's probably not out of line."
A flight from risk also appeared to be a factor on the sharemarket's decline.
While export - related stocks might rally, the overall market looked spooked , Mr Willis said.
"Risk aversion goes up in times like this," he said.
"If you were a foreign investor and took the view that this is the beginning of a long-term downtrend in the New Zealand dollar, now might be the time to lock in some profits."
But analysts said world growth was still strong enough to ride out the current US concerns.
"We have said that if the problems remain contained to the US housing market and sub-prime sectors, then the strong global economy and strong corporate earnings would see markets though this period," Peter Jolly, head of markets research at nabCapital, said today.
"We judged as did others that the risk of a wider financial system failure seemed slight.
"We have to say that this is still our judgement."
Mr Gordon said two factors were making investors cut back on risk generally around the world.
In the US subprime mortgages were facing increasing losses, and because those mortgages had been repackaged and sold to such investors as pension funds then "these losses are potentially sitting all over the place".
Some in the carry trade - where investors borrow in low yield markets such as Japan and invest in high yield places like New Zealand - had decided enough was enough.
But Grant Williamson, an equities trader with Hamilton, Hindin, Green, said the events of the day were a correction more than anything.
"There's no panic on the market, just genuine profit-taking."
- NZPA
