The New Zealand dollar retreated from its post-float highs yesterday as some semblance of normality returned to trading after the US Government reached an agreement on its debt ceiling.

The retracement, although slight, will be good news to exporters - who have seen the currency appreciate by more than 20 per cent against the US dollar since March - and Reserve Bank Governor Alan Bollard, who last month said the high value of the New Zealand dollar was acting as a drag on the New Zealand economy.

"The main feature of the last 24 hours has been that global risk sentiment has turned to the negative, so that will affect many things - commodities, equities and the high-risk currencies, like the kiwi," Westpac senior market strategist Imre Speizer told the Herald.

The kiwi was trading at US87.68c at 5pm yesterday, after sinking by almost a cent from its post-float high of US88.42c.


Dealers said the market had returned to more "normal transmission", for the time being at least, now that the US House of Representatives had approved legislation to raise the US debt limit by US$2.1 trillion ($2.4 trillion) and cut federal spending by US$2.4 trillion or more, one day before a threatened default.

BNZ currency strategist Mike Burrowes said the kiwi's fall was not directly related to the raising of the US debt ceiling.

He said there were other factors at play, such as a bout of risk aversion sweeping through the market on nervousness in the Italian banking sector.

Shares in UniCredit, Italy's largest bank, were temporarily suspended yesterday due to extreme market volatility. There were also concerns about global economic growth, which were acting against the riskier currencies.

The passing of the debt deal meant that part of the US dollar's reputation as a safe haven currency had been restored, for the time being at least.

Some foreign exchange participants are calling the kiwi higher, but BNZ expects it to hold at around present levels for the next 12 months.

"We don't believe that this is structurally normal and that the currency is going to keep appreciating over the long term, but for now the reasons for it to stay high are reasonably well supported," he said.

Westpac's Speizer said some computer valuation models suggested the kiwi was heavily overvalued.

"With the debt crisis out of the way, relationships will be restored, which will mean the overvaluation of the kiwi will have to correct itself," he said.

Markets are turning to June quarter unemployment data, due tomorrow, for indications as to whether the currency's strength could be justified by domestic fundamentals.