The New Zealand dollar dropped almost 2 US cents amid speculation that France would be the next country to have its credit rating downgraded, weighing on equity markets and growth assets.
The New Zealand dollar recently traded at 81.23 US cents, down from 83.50 cents yesterday, and fell to 70.46 on a trade weighted basis from 71.97.
Rumours that France would be the next country to be downgraded were rapidly quashed after ratings agencies Standard & Poor's and Moody's Investors Service reaffirmed the country's triple-A credit rating on stable outlook.
That was not enough to soothe nervous investors, who then shifted their focus to French bank Societe Generale, with the company's stock falling as much as 23 per cent before paring losses on fears that it is overexposed to Greek sovereign debt.
The doubts about the viability of French banks triggered a pullback in risk appetites on global equity markets, with the Standard & Poor's 500 Index falling 3.5 per cent to 1,130.09, and Europe's Stoxx 600 dropping 3.8 per cent to 223.50.
The sharp shift to risk-off mode saw demand for growth-linked assets like the kiwi and Australian dollar fall.
"European bank shares got hammered after markets went after the French banks," said Alex Sinton, a senior dealer at ANZ New Zealand. "Decisive intervention on a massive scale, be it quantitative easing or government support, is now needed, but has not been forthcoming. Heightened concerns around Europe saw the New Zealand dollar lead the way to reversing all of yesterday's gains."
On the crosses, the New Zealand dollar recently traded at 79.30 Australian cents, down from 80.72 cents yesterday. It fell to 57.21 euro cents from 58.06 cents previously, and dropped to 50.33 pence from 51.36 pence yesterday.
On the local front, markets will be watching for the release of BusinessNZ's Performance of Manufacturing Index for July and the ANZ Roy Morgan Consumer Confidence Survey for August.
The kiwi may trade between a range of 80.60 US cents and 82 cents, with the bias to the upside, traders said.