The New Zealand dollar paused for breath in the local trading session, but the mood was decidedly bearish after offshore sellers tipped the unit below US66c overnight.
At 5pm, the kiwi was buying US65.75c, well below last night's local close of US66.12c, but above an overnight low of US65.63c.
The New Zealand dollar took centre stage overnight for all the wrong reasons -- posting the biggest fall of any major currency as investors began to focus on brewing imbalances in the economy.
Currency strategists said the steep fall by the high-yielding New Zealand dollar was an early warning to investors that markets were now examining the fine print behind economies offering higher interest rates.
New Zealand's official cash rate of 7.25 percent -- the highest in the developed world -- has lured investors to buy the kiwi in the past 18 months.
But behind that high yield is a glaring trade imbalance, that pushed the country's current account deficit to $12.9 billion in the September year, or 8.5 percent of gross domestic product (GDP).
While investors were previously happy to ignore the deficit in the quest for high yields, the mood is now changing, with investors turning more risk-averse.
A major Japanese securities house was this week rumoured to have instructed its staff to stop marketing New Zealand dollar-denominated bonds to Mum and Dad investors, and the unit has been actively sold-off by hedge funds in Europe and the United States.
Interest in the New Zealand dollar is also waning as expectations for more rate hikes in the United States and Europe gather pace.
"We can expect the market to look to test the US65.00/65.30c region at the very least," BNZ currency strategist Sue Trinh said.
She said there was aggressive selling on kiwi against other currencies as well.
"Put simply, any view that the relatively high nominal interest rate structure will be enough to insulate the NZD is dead wrong.
"Yes, cash rates are high at 7 percent, but the outlook for rates (in spite of the RBNZ's on-going resistance) is to the downside on the basis of the slowing growth environment."
She noted that the difference between New Zealand and US ten- year bonds had narrowed to around 1 percentage point from 1.5 points at the beginning of the year.
The spread against the Australian dollar had narrowed to 35 basis points.
Ms Trinh expected the kiwi to lose more ground against the Australian dollar although the cross rate was steady this evening at A89.48c with yesterday's close. The Australian dollar eased against the US unit to US73.49c from US73.86c yesterday.
Rates:
5pm today 5pm yesterday
NZ dlr US65.75c US66.12c
NZ dlr/Aust dlr A89.48c A89.50c
NZ dlr/euro 0.5527 0.5547
NZ dlr/yen 77.70 78.40
NZ dlr/stg 37.75p 37.89p
NZ TWI 67.97 68.28
Australian dollar US73.49 US73.86c
Euro/US dollar US1.1894 US1.1919
US dollar/yen 118.19 118.58
- NZPA
<EM>Currency: </EM>Bearish mood as kiwi dips below US66c
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