The rapid fall in the New Zealand dollar proves recent talk of the kiwi becoming a 'safe haven' currency was hot air, say economists scrambling this morning to interpret the dramatic retreat in developed world currency and stock markets overnight.
"It seems that the New Zealand dollar may be a safe port in a storm, but not in a hurricane," said ANZ National Bank currency strategist Alex Sinton.
Traders were flooding back to US dollars as European debt problems reasserted themselves as the driving force for global economic sentiment.
"It's good to finally see our safe haven story being exposed," said head of investment strategy for JB Were, Bernard Doyle. "It didn't withstand severe pressure."
After climbing last week to a 30-year high above 88 US cents during 11th hour wrangling among American politicians over raising the US debt ceiling, the kiwi has plunged below 84 cents and was still falling mid-morning, trading at 83.24 cents.
"Everyone knows now that the Reserve Bank won't be tightening if this is the backdrop they face at the next tightening decision," said Boyle.
Reserve Bank Governor Alan Bollard signalled at last week's Official Cash Rate review that he was likely to remove the "emergency" 50 basis point cut that took the OCR back to 2.5 per cent after the Feb. 22 Christchurch earthquake, because of emerging strength in the New Zealand economy.
Doyle has been advocating such a move would be premature, saying earlier this week that leading indicators in the country's main trading partners were all falling and were around levels last seen in 2009, meaning New Zealand was prone to another bout of weakness.
"What I think this (the overnight financial markets rout) is adjusting to the fact that we do have the biggest economy in the world (the U.S.) entering its own austerity phase when most other Western economies are in an austerity phase.
"The growth outlook isn't as good as it was a year ago when we were in the rubber-band bounce back phase after the global financial crisis."
However, it was mistaken to assume that simply because Western governments were struggling to control their finances that Western economies were in long term trouble, Doyle said.
"There's a big private sector in all of these economies", which were well-placed to continue growing.
Doyle also scotched talk of a "second GFC" on the back of last night's global markets collapse, saying there had been many days where global markets had both fallen and risen more than last night's approximately 5 per cent drop.
"Days like this were the rule, not the exception," he said.
At the time of the GFC, in 2008, the world was clearly in deep recession, unlike at present.
While investor disappointment with the overnight actions of the European Central Bank was serious, "it's not that the world economy is broken," he said. "We expect Europe will probably muddle through this", with the next major event for financial market traders being tonight's release of US payroll figures.