By ELLEN READ and AGENCIES
As financial markets worldwide mulled over the effect of the Spanish bomb attacks, the kiwi had a relatively stable day, ending local trading yesterday little changed at 64.42USc - a far cry from last week's freefall action.
Last week's 5USc drop had several triggers - the lack of an interest rate rise, prospects of currency intervention by the Reserve Bank and a twitchy market deserting peripheral currencies (such as the kiwi) after the attacks.
"Both the trend in global economic data and events in Madrid have brought a rise in risk aversion. This will continue to work against high-yielding currencies, including the New Zealand dollar," said Westpac senior currency strategist Johnathan Bayley.
Reserve Bank Governor Alan Bollard appears before Parliament's finance and expenditure committee tomorrow to comment on last week.
He is likely to face questions on the central bank's currency intentions as the market grows more sure that kiwi intervention will be very unusual, if it happens at all.
"I think the market has calmed down about this and the possibly disproportionately large reaction that we've seen over the last week or so is probably largely because the market was vulnerable to liquidation of short US dollar positions against everything," said ANZ senior dealer and technical analyst Mark Elliott.
The previously high-flying kiwi's sharp pullback has cast some doubt on a return to last month's multi-year highs above 71USc, although views on this are mixed.
National Bank's official currency forecasts show the kiwi peaking at 68.8USc mid-year before pulling back to 65.9USc by December.
Bayley is holding firm to view that the kiwi will top 71USc again this year.
ANZ's Elliott is not so sure.
"The more important message is that the bigger trend is peaking and that a correction of multi-month proportions is in the offing.
"This anticipated correction should take the kiwi back in the 56USc-60USc window," he said.
Globally, financial markets are braced for a rocky week amid growing signs that al Qaeda planted the bombs in Madrid last week, stoking concern among investors that further bloodshed is being planned.
"Now that there is a growing suggestions that al Qaeda was behind the blasts, this will lead to a continued flight to quality as people weigh up the consequences for economic growth," said Adam Chestor, chief economist at Britain's HBOS Group Treasury.
If a link with Islamic militants is verified, security concerns could damage economic recovery as people refrain from travelling and spend less.
Stocks are likely to take a beating as investors opt for safe government bonds and the Swiss franc, analysts say.
"Heightened geopolitical risk tends to weigh on the [US] dollar but this time the attack is on European soil, so the implications for the dollar are more complicated," said Ryan Shea, an international economist at Bank One.
The US Federal Reserve is expected to leave interest rates on hold tomorrow, with economists picking that weak job growth and muted inflation will keep US rates steady for some months to come.
Gold, a traditional haven investment in times of trouble rose slightly - to US$397 an ounce.
Simon Weeks, bullion director with ScotiaMocatta, said prices may even fall toward a recent three-month low of around US$380.
Kiwi dollar calms down after 5USc plunge
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