KEY POINTS:
Nervous investors are watching the US for further news on the sub-prime mortgage problems that have spilled into global markets, driving New Zealand's currency down more than US2c yesterday.
Mounting concerns about a wider fallout from defaults in the US sub-prime market sent the greenback and equity markets tumbling yesterday.
But while a sell-off of the US dollar on the same concerns earlier this week sent the kiwi dollar to a fresh post-float high, this time it was caught in the downdraft as investors ran for cover and sold off high yielding but risky currencies.
From Thursday night's local close of US79.91c, the kiwi at one point retreated to a low of US77.77c yesterday morning before recovering later in the session to close at US78.33c.
"Time will tell whether it's a full recovery or just a pause," said Westpac currency strategist Michael Gordon.
While the US sub-prime concerns were not a new story, "the emphasis the market places on it has ebbed and flowed".
"Over the last few days we've increasingly had stories and rumours about losses appearing in other parts of the world as well, Gordon said.
"For now it's being treated as a more widespread issue and that saw some fairly large moves out of high yielders and some strong yen buying overnight."
ANZ National Bank chief economist Cameron Bagrie said the key to the kiwi dollar's moves over coming sessions would be global equity markets.
"They're pretty closely watching the US sub-prime activity in terms of whether that's contained or whether it's spreading into being a more widespread credit event, and the jury's out on that at the moment.
"People are just a little bit nervous out there. As risk is repriced you do take some of your riskier investments off the table and the kiwi's a bit of a riskier investment."
Likewise Gordon said the kiwi dollar's progress over coming sessions, "comes down to the latest news about sub-prime".
However, the last few days' action brought to mind the rapid but temporary unwinding of currency positions that weighed on the local currency in late February and early March.
"Once traders became comfortable that the world wasn't going to end, they all piled back into high yielders," Gordon said.
"If we don't have any further bad news, people are still in enough of a 'buying of dips' mentality that you could see them buying kiwi again."
The New Zealand dollar's losses yesterday were most pronounced against the yen against which it fell almost 2.5 per cent to a low of 92.00 before closing at 93.13 against Thursday's close of 96.35.
New Zealand's world leading interest rates mean the kiwi has been the darling of Japanese retail investors for some time.
While much of that investment has been done via "uridashi" retail bonds and investment funds, investors have increasingly favoured direct exposure via margin trades.
Sydney-based Deutsche Bank currency strategist John Horner said the US credit events were significant, "and there is potential for an unwind of the substantial short positioning that Japanese retail investors have built up in the yen and hence an unwind of their long NZ dollar positions.
"As a result we have issued a trade recommendation looking for a move lower to 87.00 in kiwi-yen."
Knock-on effect
* Concerns about US "sub-prime" mortgage problems have hit global markets sending the New Zealand dollar and sharemarket sharply lower.
* The kiwi dollar fell by more than 2c yesterday and the NZX-50 lost 1.88 per cent of its value.
* Sub-prime mortgages are home loans at the riskier end of the market that have been packaged into securities and sold off to institutional investors.
* Rising defaults in the sub-prime market have seen the value of the securities plummet inflicting losses on investors.
