KEY POINTS:
The New Zealand dollar ended a momentous week just below the post float high touched on Wednesday.
After getting a few wobbles yesterday when the Japanese and Hong Kong sharemarkets dropped 2 per cent, the kiwi recovered to finish on US74.38c against US74.02c yesterday. That's around half a cent off Wednesday's record of US74.93c.
An issue of eurokiwi bonds overnight supported the kiwi which had been weakening as investors' aversion to risk increased. However, a mild rise by US blue chip stocks helped sooth forex investors' fears.
Worries yesterday about a possible near-term interest rate hike in China to slow its accelerating economy prompted investors to unwind trades funded by low Japanese interest rates.
Any slowdown in China as a result of higher rates could crimp demand for emerging market and other risky assets, such as the NZ dollar, that have supported the carry trade, a strategy in which investors borrow cheaply to buy higher-yielding assets or currencies.
ANZ bank said the eurokiwi issuance overnight provided some assistance for the NZ dollar, but markets remained extremely nervous given the currency's current levels.
Samarjit Shankar, a director for foreign exchange at Mellon Financial Corp in Boston, said demand for carry trades had fallen, with the yen rebounding against most major currencies.
While the NZ dollar fell against the yen yesterday -- from 88.80 to 86.70 -- it regained lost ground overnight and ended today on 88.25.
The NZ dollar also strengthened against the aussie, to A89.09c from A88.88c at 5pm yesterday. Against the euro it rose to 0.5462 from 0.5445. The trade weighted index rose to 71.81 from 71.46.
Next week, the market will be fixated with the Reserve Bank's decision on interest rates. Although all the data points to another rate rise, as threatened by bank governor Alan Bollard in March, some economists believe there has been sufficient tightening of conditions by markets for him to hold off.
The currency has risen 10 per cent since March 8 and 90-day bank bills have risen sharply to over 8 per cent.
However, the other school of thought believes Dr Bollard needs to keep socking it to borrowers until house buyers get the message and prices start to retreat.
Dealers said markets will be edgy ahead of Thursday's decision and some volatility can be anticipated.
In major currency trading, the yen slipped after US share prices managed to hold up despite sharp drops in other stock markets on worries about an overheating Chinese economy, calming fears of a massive unwinding of yen carry trades.
"Movements in stock markets continue to be the main factor in the currency market, although the Dow's solid performance overnight soothed worries about yen carry trades a bit," said Tsutomu Soma, a senior manager at Okasan Securities.
The euro hit a two-year high of US$1.3629 against the dollar in early Asian trade before retreating to US$1.3615 as expectations that the European Central Bank will boost interest rates in the coming months supported the single currency.
Reuters currency rates:
5pm today 5pm yesterday
NZ dlr/US dlr US74.38c US74.02c
NZ dlr/Aust dlr A89.09c A88.88c
NZ dlr/euro 0.5462 0.5445
NZ dlr/yen 88.25 87.17
NZ dlr/stg 37.15p 36.95p
NZ TWI 71.81 71.46
Australian dollar US83.47c US83.30c
Euro/US dollar 1.3618 1.3501
US dollar/yen 118.68 117.96
- NZPA