KEY POINTS:
The New Zealand dollar took another beating today after equity markets sold off heavily on concerns about liquidity in the US mortgage market.
Dealers said investors were running from risk and the kiwi was looking very shaky.
Wall Street plunged around 2 per cent on concerns about defaults in the high risk mortgage market prompted by one lender saying it needed more capital.
Foreign exchange markets were in lock-step with equities markets.
"The kiwi's been hammered pretty hard along with the other investor currencies for the carry trade," said ANZ dealer Mark Elliott.
Unwinding of carry trades, where investors borrow in low interest jurisdictions and invest in high interest ones, was gathering pace.
"Equity markets have taken a hammering on the softer US markets overnight and the belief that there is more fallout to come from these subprime mortgage defaults," said Mr Elliott.
"It's something that could really gather pace if we see things come off too much further. Stock markets look vulnerable to further losses, and probably further big losses."
The trend away from risk and the carry trades began at the end of last month when the Shanghai sharemarket took a 9 per cent one-day dive.
The kiwi lost ground against all currencies today. Against the US dollar it dropped a cent from yesterday's close to finish on US68.53c. Against the aussie, it closed on A87.70c from A88.53c yesterday, while against the yen it dropped to 79.60 from 81.73.
The trade-weighted index lost 1.6 per cent to 67.48.
The ANZ bank said the kiwi's rise yesterday appeared to be a last gasp spike by the NZ dollar.
Even another interest rate rise was unlikely to underpin the kiwi. While its yield attraction remained, worries about the US mortgage market would see increased volatility and higher risk aversion, ANZ said.
A speech by Reserve Bank governor Alan Bollard tomorrow morning to the Wellington Chamber of Commerce is unlikely to add anything to comments he made last week, dealers said.
All markets were unnerved after major US subprime lenders, Accredited Home Lenders Holding and New Century Financial Corp, said they needed to raise cash after paying back lenders.
US data showed late payments on US mortgages hit a 3-1/2-year high in the fourth quarter and rising delinquencies in 49 of 50 states.
Asian shares suffered, with the Nikkei average tumbling nearly 3 per cent by midsession.
But the US dollar recovered in the Tokyo session to near 116.15 yen on buying demand from Japanese importers and investors, as well as speculators covering short positions after the US currency's slide bottomed out.
"Concerns about the subprime market have triggered a resumption in risk-aversion trades seen at the beginning of the month," said Hiroshi Yoshida, foreign exchange trader at Shinkin Central Bank.
Reuters currency rates:
5pm today 5pm yesterday
NZ dlr/US dlr US68.53c US69.55c
NZ dlr/Aust dlr A87.70c A88.53c
NZ dlr/euro 0.5195 0.5273
NZ dlr/yen 79.60 81.73
NZ dlr/stg 35.49 35.99p
NZ TWI 67.48 68.56
Australian dollar US78.16 US78.57c
Euro/US dollar 1.3192 1.3188
US dollar/yen 116.13 117.48
- NZPA