KEY POINTS:
The kiwi dollar hit a fresh 5 1/2-year low of US54.35c last night as fears for the Japanese economy prompted currency speculators there to bring cash home - causing the yen to surge.
The dramatic rise in the yen drew a warning yesterday from the Group of Seven
(G7), which said it threatened financial and economic stability.
The yen was the only currency mentioned in a brief G7 statement issued as it rallied to a 13-year high against the dollar, threatening Japanese exports as the world's second-largest economy tumbles toward recession.
With Tokyo's Nikkei share average hitting a 26-year low and shares of Japan's biggest banks tumbling on fears that they would have to replenish capital, Finance Minister Shoichi Nakagawa said the G7 was worried about volatility in the yen.
"We continue to monitor markets closely and co-operate as appropriate," Nakagawa said, reading from the G7 statement.
The kiwi and aussie dollars felt the full force of the yen's surge overnight Friday.
The Australian dollar suffered its biggest sell-off since it was floated in 1983, prompting the Reserve Bank of Australia to intervene - buying dollars to try to prop it up.
The aussie plunged US4.5c to US61.78c in the session to Saturday morning (NZ time). The kiwi dropped about US3.5c.
The Reserve Bank of Australia intervened in foreign exchange markets for the second trading day in a row yesterday, buying Australian dollars as the currency traded near a five-year low against the US currency.
The central bank "provided more liquidity to the foreign exchange market", a spokesman for the Sydney-based RBA said yesterday. He declined to be identified.
The intervention yesterday followed a similar move overnight on Friday when the central bank bought Australian dollars, according to the spokesman.
In New Zealand the Reserve Bank declined to comment on the issue.
However as the kiwi dollar continued to fall last night there was little evidence to suggest the Reserve Bank had made such a move.
The Australian and New Zealand dollars are favourite targets of carry trades, in which investors borrow in nations with low interest rates and buy higher-yielding assets elsewhere.
As Japanese investors become more risk-averse, they are unwinding their positions in the kiwi and aussie dollars, sparking sharp falls.
Japan's currency has jumped this month by 13 per cent against the greenback, 26 per cent versus the euro, 44 per cent against the Australian dollar and 36 per cent versus the New Zealand dollar as traders slashed carry trades.
Japan's benchmark rate of 0.5 per cent compares with 6 per cent in Australia and 6.5 per cent in New Zealand.
"Investor confidence is shot to ribbons and it's the carry trades that are copping it fair and square in the face," said Paul Milton, chief foreign-exchange dealer at Societe Generale SA in Sydney.
The Australian dollar had tumbled 34.4 per cent against the yen and 25.5 per cent versus the greenback over the past month as investors have dumped equities amid widespread concern that the global economy will fall into recession.
New Zealand's currency has fallen 29.3 per cent and 18.7 per cent against the yen and dollar, respectively.
YEN SHOCKWAVES
* The yen is surging as investors in Japan bring cash home.
* That has caused the kiwi and aussie dollars to plunge.
* The kiwi hit a fresh 5 1/2-year low below US55c last night.
* The G7 has warned that the yen's rise threatens global economic stability.