Long-awaited news from the US Federal Reserve that it would soon start to wind back its quantitative easing programme sent the New Zealand dollar on a rollercoaster rise yesterday, moving up and down over a US1c range in just 40 minutes.
The end of quantitative easing, which is aimed at pump priming a lagging US economy, has been the subject of intense conjecture since early this year.
Early yesterday morning (NZT) the markets were put out of their misery when the Fed said it would start to taper by next month, cutting back its US$85 billion monthly bond buying programme to US$75 billion.
"We've been talking about it since April, so thank God it's finally arrived," said ANZ senior manager of foreign exchange Sam Tuck.
The US sharemarket rallied sharply on the news, with the Dow Jones industrial average closing 292.71 points higher at 16,167.97 - its highest ever point.
The initial reaction was for markets to buy US dollars at the expense of most other currencies, which sent the New Zealand dollar sharply lower. But on closer examination the Federal Open Market Committee's message to the markets had a "dovish" element to it - keeping official rates lower for longer - and the kiwi bounced back, trading in a range of US81.80c to US82.80c in 40 minutes.
The kiwi was pushed back down again when the yen and the euro started to flag on the back of renewed US dollar buying, but rallied back to US82.50c after the release of stronger than expected GDP data for the September quarter.
By the end of the local session, the kiwi had fallen back again closing at US81.80c, down from US82.50c in late trading on Wednesday.
The Fed's still highly accommodative stance meant that the kiwi can afford to stay stronger for longer, Tuck said.
In an apparent attempt to stop the market from getting ahead of itself, Fed chairman Ben Bernanke said the central bank planned to hold its key short-term rate near zero well past the time when unemployment falls below 6.5 per cent from its last reading of 7 per cent.
BNZ strategist Kymberly Martin said the dual nature of the announcement created a short period of extreme volatility.
Martin said the latest announcement recognised that conditions in the world's biggest economy were improving. That meant the appetite for risk was improving, and with the kiwi regarded as being at the riskier end of spectrum, the local currency could gain ground as a result.
Bernanke said the Fed expected to make similarly moderate reductions in its monthly bond purchases if improvements continued.
• Federal Reserve cutting bond-buying US$10b month.
• Aim of the plan is to pump prime a lagging US economy.
• Cutback a sign world's biggest economy improving.
• US shares rallied and kiwi dollar saw extreme volatility.