The New Zealand dollar rose sharply early yesterday against a dramatically weakening US greenback in response to news the US Federal Reserve will flood financial markets with even more new cash in coming months.

The Fed said it would buy US$300 billion of long-dated Treasuries over the next six months to boost the US economy.

"Effectively, the Fed is expanding its balance sheet by US$1.15 trillion and investors fear the increase in US money supply will erode the purchasing power of the US dollar," said BNZ currency strategist Danica Hampton.

"While the fears triggered knee-jerk selling of the US dollar last night, it must be noted that the link between whether or not quantitative easing undermines the US dollar is inflation. Only if quantitative easing stokes inflation will it weigh on the US dollar."

The kiwi surged by almost 4 per cent to a two-month high around US54.60c immediately after the announcement but by the end of the session was finding its level around the US54c mark.

Westpac market strategist Imre Speizer said it was likely to settle around that area or perhaps US53.50c.

However he did not rule out further kiwi dollar strength, or more correctly US dollar weakness, over coming days.