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The New Zealand dollar plunged over US2c, or 3 per cent, in a slump begun on Wall Street and precipated by a credit crunch originating in the US subprime mortgage market.
"It was certainly frenetic," said ANZ Investment Bank chief dealer Murray Hindley. "That's what happens when you get a meltdown in global credit markets."
He said all eyes would be on Wall Street tonight but he wouldn't be surprised if the kiwi fell another cent in overnight trading.
The kiwi ended the local session at a two-month low of US74.50c compared with US76.80c at yesterday's close. It has fallen 8.8 per cent in under a month since hitting a post-flat high of US81.6c.
The turmoil was global but the New Zealand dollar was hammered because of it has been at the centre of the so-called carry trade -- where investors borrow in low interest rate Japan and reap high rates investing here. The trade is seen as risky and when markets are volatile, investors bail.
Mr Hindley believes there could be more problems as more banks report exposures to the US subprime market.
While a top for the kiwi had formed around US74.80c the floor was uncertain and he felt a move to US72.50c could happen quick-time.
"We're still in a situation where lots of people are trying to shed risk," said Koji Fukaya, senior currency strategist for Deutsche Securities.
"If equities keep falling and end lower before handing the baton to Europe, we can only pray for the moves to stop," Mr Fukaya said.
The turmoil began after France's biggest listed bank, BNP Paribas, froze 1.6 billion euros ($2.95) billion) worth of funds, citing woes in the US subprime mortgage sector.
The news sent US and euro zone overnight borrowing rates up sharply as banks scrambled for cash amid deepening concern about credit market losses, which pummelled equities markets and spurred a rush to unwind risky carry trades. Wall Street indices dropped nearly 3 per cent.
ANZ said issues had been highlighted by the overnight lending from central banks, injecting money into the banking system after liquidity became extremely tight.
"In this environment, volatility and risk aversion will rise, which is an environment the NZD typically underperforms in regardless of its attractive yield advantage."
The Australian dollar was also smacked by the carry-trade aversion, closing at US84.36c against US86.50 at the same time yesterday. The kiwi cross rate dropped to A88.27c from A88.75c -- its lowest level in five months.
The kiwi's slide against the yen was more dramatic -- down to 87.88 from 91.86 - a three month low. The trade-weighted index fell to 71.57 from 73.40 yesterday afternoon.
- REUTERS