The New Zealand dollar surged to a fresh post-float high yesterday, driven by a strong domestic economy and renewed concern about America's debt woes.
The currency is now at levels where the Reserve Bank has in the past intervened and sold kiwi dollars to drag down its value.
The kiwi dollar hit US87.07c - its highest point since floating in early 1985 - as a partial consequence of the US dollar taking a hammering against all the major currencies as concern globally about a looming sovereign debt crisis for the world's biggest economy continued to mount.
President Barack Obama said in a speech that the nation's burgeoning debt threatened to do serious damage to the US economy and that Congress must compromise to address future deficits.
Obama called on lawmakers to put politics aside to reach a deal on a balanced approach and blamed the current stalemate on a group of Republicans in the House who are insisting on budget cuts and no tax increases.
House Speaker John Boehner, a Republican, said in a rebuttal that Obama was asking for a "blank cheque".
US Treasury Secretary Timothy Geithner has said the Government will run out of options to prevent a default on August 2 unless the debt ceiling is raised.
Domestically, the key influence on the New Zealand dollar continues to be a strong economy, which has helped drive the NZ/US dollar rate up by 22.3 per cent since March.
Renewed strength in the economy has helped entrench the view that the Reserve Bank will need to outline a more aggressive stance on interest rates when it releases its official cash rate review tomorrow.
A high kiwi dollar presents a major problem for exporters as it diminishes their returns when they are repatriated back into New Zealand dollars, but it is a big plus for importers as it makes the price of overseas goods cheaper.
The central bank needs to meet four criteria before it can intervene. The first is that the currency must be exceptionally high or low. The second is that the currency's level must be unjustified relative to economic fundamentals. The third is that intervention must be consistent with monetary policy and the fourth is that it must stand a reasonable chance of success.
BNZ currency strategist Mike Burrowes said that while the first criterion had clearly been met, he was doubtful about the others. "I'm not sure that for now the conditions are there right now to warrant intervention," Burrowes said.
Nevertheless, the currency is nearing the "zone" when the Reserve Bank has intervened in the past.
The trade-weighted index, which measures the kiwi against the currencies of New Zealand's major trading partners, has continued to rise.
It hit 74.1 yesterday, just short of its last peak of 74.28 in February of 2008 and its post-float high of 77.23, set in July 2007 - both periods when there was central bank intervention.
Westpac's senior market strategist Imre Speizer said the market was very "long" kiwi dollars but that he did not expect to see a major reversal any time soon.
"I think that if the Reserve Bank senses that the kiwi is starting to get a wobble ... it would be a perfect opportunity for them to sell," he said.
BNZ's Burrowes said: "It's hard to say where it goes from here, but it is fair to say that it will be well supported."
Much of that support is expected to arise from the prospect of higher interest rates over the next 12 months.
- additional reporting: BLOOMBERG