KEY POINTS:
The dollar bubbled on the verge of a new post-float high last week, after the US Federal Reserve slashed interest rates by 75 percentage points.
Our currency could yet hit new highs, with the kiwi simmering below its record of US82.13c at US81.50c on Wednesday.
Westpac market strategist
Michael Gordon said the kiwi was so close to its post-float high it could break through any day.
By Thursday night, the kiwi had settled to US80.14c, but Gordon warned that exporters waiting for a big drop in the dollar could be waiting a long time.
"I think the US dollar's going to remain weak throughout the year, and that will hold up the kiwi over this year," he said.
"We could conceivably see it averaging around 80c for at least the rest of this year."
The kiwi dollar becomes more attractive to investors with each rate cut by the US Federal Reserve. New Zealand's benchmark interest rate is now a full six percentage points higher than the US rate, which is a measly 2.25 per cent.
The Fed has cut rates by three percentage points in an attempt to buoy the US economy as a response to the credit crisis.
Gordon said the two main conditions supporting the Kiwi dollar - a weak dollar in the US and high interest rates here - were likely to continue for the rest of the year. Interest rate cuts would be more likely next year and the New Zealand dollar would start to head lower.
Gordon said the money market was counting on the Reserve Bank cutting interest rates this year - earlier than it has led the market to believe. If the early cuts don't pan out, that would boost the kiwi dollar.
However, he said jittery investors were making the normally straightforward relationship between the dollar and interest rates harder to judge.
In periods of economic calm, currencies tended to follow interest rates fairly closely. But since the credit crunch began in the middle of last year, investors had been building an element of risk into fringe currencies, such as the kiwi, that were not included in any of the benchmark indices.
"[The kiwi] hasn't risen as much as the change in rates would have suggested," he said.
"The issue with the kiwi dollar now is you're getting relatively more attractive yields versus the US dollar, but at the same time the market is actually demanding a higher premium to hold New Zealand dollars."
But he said that the pricey dollar showed plenty of people were still willing to take a punt on the kiwi.
"While the markets are quite down at the moment, it's very noticeable that the kiwi is still up around 80c," said Gordon.
"If anything is going to scare people out of the New Zealand dollar it's something we're not thinking about. It's not sub-prime and it's not housing."
The kiwi has touched US82.13c twice this year. It has climbed 16 per cent against the greenback over the past year, with investors flocking to take advantage of our high benchmark interest rate.