KEY POINTS:
The New Zealand dollar slumped more than half a cent today after Reserve Bank governor Alan Bollard signalled today's rate rise might be the last in the cycle.
Foreign exchange dealers pondered whether the kiwi had peaked on Tuesday when it hit a 25-year high of US81.6c, possibly ending a five-year uptrend.
The currency market was caught off guard by the dovishness of Dr Bollard's statement.
The kiwi initially dipped when he commented he thought four successive rate hikes "will be sufficient to contain inflation". It then rebounded before it was sold sharply when the Tokyo market opened and as traders sold kiwi for yen.
After a choppy session the currency closed on US79.91c, above its low, compared with US80.57c at yesterday's close.
"The market has taken it that that could be the end of the cycle," said ANZ chief dealer Murray Hindley.
If the next batch of New Zealand date was weak then the market would assume that was the end of the tightening cycle and the top had been seen.
"It may be too early, but we certainly have seen some kiwi-yen selling which has knocked it down."
Mr Hindley noted that the previous three interest rate hikes this year had resulted in renewed Japanese buying of kiwi dollars.
"We never really saw that and we saw some of the larger accounts liquidating kiwi-yen positions."
Following yesterday's stronger-than-expected inflation data in Australia, there had also been switching into aussie dollars from kiwi.
The kiwi closed at A90.91 from A90.94c yesterday.
Mr Hindley said if US79.60c broke, then the kiwi could drop sharply. Resistance was now apparent at US80c.
Bank of New Zealand currency strategist Danica Hampton said the suggestion from Dr Bollard the tightening cycle could be close to its peak was a surprise.
"So the initial reaction was for everyone to think `it's a completely done deal' and sell the currency."
The market had been pricing about a 20 to 30 per cent chance of another hike after today, Ms Hampton said.
But when people read Dr Bollard's statement closer, they saw the possibility of an end to interest rate hikes was conditional on the New Zealand economy continuing to moderate, she said.
That meant "back to data watching".
BT fixed interest manager Andrew Blackler noted it was the fourth time in three years Dr Bollard had signalled the end of his tightening cycle only for rates to rise again six months later.
He predicted further hikes in either December or January with the risk of more to come.
The trade weighted index ended the session on 76.24 from 76.65 yesterday.
The drop in the NZ dollar came against the backdrop of a sharp rise in the greenback, which posted its biggest daily gain in a year against a basket of major currencies in a technical rebound after hitting fresh record lows against the euro.
Investors shrugged off an unexpectedly soft report on US existing home sales, and instead bought back the greenback after its sharp fall this week driven by growing worries about weakness in the US subprime mortgage market.
Reuters currency rates:
5pm today 5pm yesterday
NZ dlr/US dlr US79.91c US80.57c
NZ dlr/Aust dlr A90.31c A90.94c
NZ dlr/euro 0.5827 0.5832
NZ dlr/yen 96.35 96.90
NZ dlr/stg 38.95p 39.12p
NZ TWI 76.24 76.65
Australian dollar US88.46c US88.61c
Euro/US dollar 1.3713 1.3813
US dollar/yen 120.58 120.32
- NZPA
