The New Zealand dollar, after a stellar run last month, has been brought back down to earth as concerns about China, world economic growth and lower commodities prices take hold.

The currency put on a surprisingly strong run against the US dollar last month, gaining 4 per cent to US68.40c by the year's end. Since then, the currency has lost more than US2c, trading recently at US66.17c.

Towards the end of last year, the kiwi seemed impervious to a raft of bearish factors, such as sharply lower world equity markets, falling commodities prices, an official interest rate cut from the Reserve Bank, and a long awaited rate hike from the US Federal Reserve.

Historically, the local currency has tended to end the year strongly, possibly due to export hedging and other seasonal factors, so some weakness in the New Year was not unexpected, said Bank of New Zealand currency strategist Jason Wong.


"We probably would have fallen anyway but on top of that, we have been in a pretty hard global environment with the Chinese devaluation and equity markets tumbling."

China's Shanghai Composite Index fell 10 per cent last week, during which share trading was halted twice.

Extreme volatility on world equity markets would also typically apply downward pressure as investors became more risk averse and less inclined to gain exposure to a fringe currency such as the Kiwi dollar.

"It's very much a risk-off environment, which would typically drive the Kiwi dollar lower anyway," Wong said.

"Commodities prices have continued to fall. Now, the fundamentals have come in to play, which are driving the kiwi lower still," he said.

"We think the downtrend has some legs to it it, so we think that the kiwi has got some more downside from here."

Other banks also expect to see a decline in the kiwi and ANZ expects the currency to drop to US60c to US65c by the end of this year.

China's share markets represent only a small part of that country's gross domestic product - relative to the larger role they play in most western economies - so analysts are focused on what is happening with the economy rather than the markets.


Looking ahead, the bearish factors are starting to mount for the New Zealand dollar. China devaluing puts downward momentum on Asian currencies, and the kiwi is linked to that. Other forces include the outlook for commodities prices such as dairy, which is still suffering from oversupply and soft demand globally.

If world equity markets continue to fall, more pressure is expected to come on to the Kiwi dollar. Further rate hikes by the US Federal Reserve, which last month raised borrowing costs for the first time in nearly a decade, will also put pressure on the currency.

Wong said: "In terms of its long-term value, we think that it is about right, but there are cyclical forces going on, which means that the currency should continue to depreciate."