KEY POINTS:
The New Zealand dollar and sharemarket were again dragged lower yesterday by anxiety from the US sub-prime crisis.
Following another grey day on Wall St on Friday, the New Zealand dollar extended last week's losses, ending yesterday on US75.43c against Friday's local close of US77.68c.
Currency strategists said the fall in US equities had sparked further risk aversion, particularly among carry traders who borrow low yielding currencies like the yen to invest in high yielding but riskier currencies like the kiwi and aussie dollars.
"It seems people are increasingly worried that the financial sector is going to be weighed down by the ongoing credit concerns related to the sub-prime crisis and that fourth quarter corporate earnings are looking pretty lacklustre," said Bank of New Zealand currency strategist Danica Hampton.
"It would take a strong bounce in European and US equities markets to dislodge that sentiment and I just don't think that's likely," she said.
The NZSX-50 ended its session down 1.12 per cent at 4089.13, its lowest close since late August. Stephen Wright of ASB Securities said the losses were across the board with few exceptions.
"If the US keeps going down our market will certainly continue to drift ... when the sentiment's negative, everybody's negative."
While a September recovery in equity markets after the sub-prime-related plunges over the two preceding months had sparked hopes the problems would be short lived, events such as losses suffered by leading US investment banks have rekindled fears.
"I think there is an increasing sense of concern," Hampton said.
If US fallout spread to Europe, the NZ dollar would continue to head lower. However, unlike its plunge in July and August, market positioning meant further falls were unlikely to be as dramatic.
Deutsche Bank economist Darren Gibbs said sub-prime concerns had been rising.
"If you look at some of the measures of volatility and credit spreads and the like they're almost back out to where they were at the height of the initial crisis back in August." Gibbs said new US accounting standards come into force this week which could further reveal the extent of losses suffered by the financial sector.
"A lot of banks are having to make statements about what they think the value of their assets are, therefore we're going to see perhaps over the next few days more bad news."
