KEY POINTS:
The New Zealand dollar looks increasingly likely to trade above the US70c mark before the year end as US economic worries continue to drive the greenback lower.
But economists still believe the kiwi dollar's gains are its swansong before an "aggressive turn" early next year.
Yesterday the local currency hit a 10-month high of US68.88c as its US counterpart lost further ground after the latest in a series of poor economic data.
A survey of US manufacturing released on Friday showed output declining for the first time in more than three years. That in turn reinforced expectations that US Federal Reserve chairman Ben Bernanke will slash interest rates to stave off a recession.
"The US dollar has been thumped, and market sentiment is that there is more around the corner," ANZ economists said.
"For now US dollar weakness looks set to extend and the NZ dollar has US70c written all over it. Data tends to run in strings and we suspect the string of softness being seen in the US at present will extend to Christmas."
Likewise, Deutsche Bank's Sydney-based currency strategist John Horner said the greenback was likely to continue its slide for the rest of the year.
"The US employment report on Friday will be important. We're looking for a below consensus result and that should keep the US dollar under pressure."
Horner pointed out that the kiwi dollar had made little progress against other currencies apart from the Aussie dollar, and was unlikely to do so unless the Reserve Bank delivered a more hawkish than expected monetary policy statement on Thursday.
Westpac currency strategist Michael Gordon said the market expected the Reserve Bank to leave the official cash rate unchanged, but would keep a tightening bias in the face of a pickup in some activity indicators.
"The wild card in this equation is the currency's recent strength and perhaps more importantly the potential for more to come, if a continued US dollar decline, momentum buying, and/or seasonal strength in the kiwi come into play. In this environment, an overly hawkish statement would only add fuel to the currency's fire."
ANZ head of market economics Cameron Bagrie, while describing the US dollar's slide as "disconcerting", found some upside.
"The kiwi dollar's going to get one last squeeze up, but then my suspicion is we're going to turn aggressively, in April or May next year.
"The light at the end of the tunnel is the way the US dollar has reacted to weak economic data. That reinforces that when the New Zealand dollar turns, it is going to turn very aggressively and we are going to see another move like we did in early 2006.
"If we get four or five economic barometers all pointing in the same direction, the currency will re-price and that's really what the US dollar's been going through at the moment."
Recent indicators had shown some pick-up in the domestic economy, but he expected a completely different picture in the new year.
"I'll be looking at the housing market, the retail sector and export performance. At some stage we are going to get the sustained slowdown the RBNZ is seeking and once those domestic economic barometers turn the New Zealand dollar's off to the races."
Pale green
* The greenback has fallen swiftly in the past week on US economic worries including:
* US manufacturing output in November was the lowest since April 2003.
* Softer US housing market indicators. While they appear to have bottomed out, the impact of earlier sharp falls is now starting to affect the broader economy.
* US consumer confidence slipped in November.
* October durable goods orders fell sharply suggesting growth in business investment may be slowing.
* Rising unemployment claims suggest that the US labour market is slowing. Markets will be watching Friday's employment report for a clearer picture.
Adding to the greenback's woes:
* Asian economies, particularly China, have signalled their intention to diversify some of their foreign exchange reserves out of US dollars.
* The US current account deficit is seen as unsustainable.
