KEY POINTS:
The New Zealand dollar was dumped today for the second time in the week as investors unwound carry trades.
Forex markets are nervously watching equity markets which have been volatile in the wake of the 9 per cent selloff in the Shanghai market on Tuesday.
The New Zealand dollar is seen as particularly vulnerable as market volatility is considered unfavourable for carry trades -- where investors borrow in low yielding currencies and invest in high interest rate regimes.
The kiwi lost the best part of a cent against the US and Australian dollars. At 5pm it was buying US69.28c compared with US70.05c yesterday. The kiwi has lost nearly 3 per cent against the US dollar and 4 per cent against the yen since Tuesday.
Against the yen, the kiwi fell to 81.51 from 82.80 at yesterday's close and 85 yen before the Shanghai market plunge.
Sliding share prices saw some investors buy back the Japanese currency, which they had borrowed to finance bets on higher risk, higher yield currencies like the New Zealand dollar.
In a warning to markets, Japan's top financial diplomat, Hiroshi Watanabe, said investors should recognise the two-way risk in highly leveraged carry trades financed by borrowing in yen.
ANZ chief dealer Murray Hindley said markets would be nervous again tonight with some Asian bourses struggling.
"Equities markets are certainly the leaders in terms of any currency moves.
"We have seen liquidation in these carry trades. If we see another hit in the equities markets, you will see these carry trades being unwound.'
Next week, the local focus will turn to the Reserve Bank's quarterly monetary policy statement where economists universally expect governor Alan Bollard to hike rates on Thursday.
Mr Hindley said there was no suggestion yet that market volatility was sufficient to make Dr Bollard stay his hand.
However, he said the rate rise was fully priced into the kiwi and it was unlikely to rally on a rate hike.
Against the aussie dollar, the kiwi fell to A88.32c from A89.15c. The trade-weigthed index closed on 68.26 from 68.98 yesterday.
The Australian dollar eased to US78.50c from US78.62c.
The US dollar edged up against the yen and euro.
Investors were keeping an eye on stocks as Tokyo's Nikkei average fell 1.3 per cent. Shanghai's stock market posted an initial 0.8 per cent gain.
The US dollar had tumbled to an 11-week low against the yen yesterday as another wave of investors unwound carry trades.
Traders said there was still a threat that more investors may need to cover their hefty bets against the yen, putting more pressure on the dollar, euro and major currencies.
The euro has shed 2.8 per cent this week against the yen, on track for its biggest weekly drop in nearly three years.
Last year, the euro surged almost 13 per cent against the yen as the European Central Bank ratcheted up rates but the Bank of Japan raised rates only once.
"The unwinding of positions in stocks and currencies is still continuing, and sentiment remains jittery in the market," said Takeshi Iba, head of the Tokyo FX department at Calyon. "As the market hits new lows, more unwinding is likely to come."
Reuters currency rates:
5pm today 5pm yesterday
NZ dlr/US dlr US69.28c US70.05c
NZ dlr/Aust dlr A88.32c A89.15c
NZ dlr/euro 0.5260 0.5300
NZ dlr/yen 81.51 82.80
NZ dlr/stg 35.37p 35.70p
NZ TWI 68.26 68.98
Australian dollar US78.50c US78.62c
Euro/US dollar 1.3165 1.3221
US dollar/yen 117.68 118.25
- NZPA