KEY POINTS:
Uncertainty about the US Government's crucial bailout of mortgage giants Fannie Mae and Freddie Mac is giving the kiwi dollar a stomach-churning ride.
The kiwi closed at US66.29c yesterday, about 20 points above its session low but well below its US68.20c level at the same time on Monday.
Intraday moves of a cent or more have become common largely because of international financial turmoil.
Commenting on the local unit's move lower yesterday, Westpac currency strategist Michael Gordon said rumours of central banks selling euros overnight saw the European currency and other majors apart from the greenback plunge.
The big story though was the US Treasury's plan to bail out Fannie Mae and Freddie Mac.
The market was in two minds about the package.
"On one hand the plan provides more certainty and so was initially taken as good for riskier investments including the kiwi dollar. At the same time it's bad news for the US because they would have to issue a lot more government debt to pay for it."
Gordon said US authorities appeared to be "cleaning house" following the credit crisis a lot faster than their European and Asian counterparts, which was a potentially positive factor for the greenback.
BNZ currency strategist Danica Hampton said the "very exciting" volatility in the kiwi and other currencies was because of global uncertainty.
Last week's themes were concerns that the global economy was slowing just as sharply if not more so than the US, which had the effect of propping up the greenback as the best of a bad bunch. That was reinforced when big losses on equity markets sparked a round of risk aversion, resulting in a heavy sell-off of growth-sensitive currencies like the kiwi.
The combined effect saw the kiwi pushed down to 22-month lows of US65.90c on Friday.
However, with the rescue package, "there's uncertainty now as to what this means for the world".
"The overwhelming consensus appears to be that there's no silver bullet but this should help shore up the mortgage market in the US a little and should provide a bit of near term relief for the financial sector."
Gordon said market movements were exaggerated because they were playing out during the Northern Hemisphere summer, historically a period of diminished liquidity and heightened volatility for the kiwi.
"We tend to find that when the Northern Hemisphere is on summer break you get larger price movements for small volumes traded. Anyone getting into the market is making a huge splash and moving the price along."
