KEY POINTS:
High commodity prices and New Zealand's low long-term inflation mean the kiwi is unlikely to fall much below US60c when it eventually drops, economists say.
The NZ dollar briefly topped US72c to hit a 22-month high early yesterday as the greenback weakened on concerns about the United States housing market and consumer confidence. It closed at US71.4c.
Since hitting what is viewed as the top of its current cycle at US75c in late 2005, the kiwi's depreciation has been delayed as it continues to find support from overseas investors attracted by New Zealand's high interest rates.
But other factors have been at work increasing the kiwi's "fair value" - its average value over the cycle or the level where both exporters and importers are reasonably comfortable.
As a result, the currency is unlikely to fall anywhere near the lows of US38c it hit at the bottom of the previous cycle in early 2000.
"Very clearly this currency cycle is going to be different," said ANZ chief economist Cameron Bagrie.
The currency's previous lows were driven by strength in the US dollar and by domestic economic conditions.
"I don't think New Zealand is headed for recession this time around, that's typically where we see really big falls in the New Zealand dollar."
But the other big reason was the kiwi's increase in fair value.
Bagrie put its fair value now at between US63c and US65c.
Given the top of the currency's cycle was US75c, it was reasonable to expect it to overshoot fair value by 10c on the downside.
"To be honest, I think the kiwi's going to struggle to go below US60c. We might get to US57c but we'd need something major to happen."
A major factor underpinning the rise in fair value was higher commodity prices. "To justify the New Zealand dollar going that low [US38c] you'd need to see a massive rout in commodity prices."
Westpac economists are reviewing their estimates of the New Zealand dollar's fair value to reflect changes in relevant factors.
Westpac's Dominick Stephens said those included long-run interest rates and New Zealand's productivity as well as commodity prices.
"Fair value has increased significantly mainly on the back of those higher commodity prices."
But Stephens also said New Zealand's average rate of inflation over the past decade had been lower than that of the US and Australia.
"Our currency should appreciate gradually over time in relation to those currencies and it has."
Reserve Bank research, albeit done some time ago, suggests the kiwi's fair value is around US56c to US60c.
Westpac was still crunching numbers on where it now saw fair value for the kiwi against the greenback but, according to Stephens, it wasn't "a number with a five in front of it".
Meanwhile, Deutsche Bank chief economist Darren Gibbs has been monitoring commodity prices and their capacity to hold at current levels.
"There's some optimism particularly in the dairy area. If that's the case then we can sustain a higher currency."
Dairy is New Zealand's biggest export earner, accounting for roughly 20 per cent of export earnings.
In the meat sector, lamb was struggling but beef prices were reasonably favourable.
Gibbs said prices for grain were rising as a result of its increasing use in ethanol production. That was resulting in higher production costs for Northern Hemisphere farmers, which would continue to underpin beef and dairy prices. He believed fair value was "slightly north of 60c".