Martin Rudings, senior dealer at OMF, said the possibility of retaliation was weighing on sentiment as were concerns about how other nations would respond, in particular in the Middle East.
According to Reuters, Iraq's parliament on Sunday recommended all foreign troops be ordered out of the country and Iran said it would abandon limits on its uranium enrichment programme.
"We are in a bit of a predicament that could go on for a while," said Rudings. "It's not a kiwi story, it's a risk-off event."
He said investors were turning to the Japanese yen as well as gold, with spot gold hitting US$1,577.27 per ounce, the highest since April 2013.
Oil prices were also getting pushed around with Brent crude rising above US$70 a barrel.
Rudings expected markets to remain volatile as Europe and the US open. "I think this is going to continue and we are at the early stages of it."
He warned, however, there could be so-called "black swan" events – which are events that come as a surprise to markets. Any volatility will be exacerbated by the fact that liquidity is light due to the holiday period. He said there is a risk the kiwi dollar could slip below 66.00 US cents in the short term.
The New Zealand dollar was at 95.81 Australian cents from 95.83 cents late Friday in New York. It was at 50.82 British pence from 50.94, at 59.57 euro cents from 59.66 and at 4.6369 Chinese yuan from 4.6407.
The two-year swap rates fell to a bid price of 1.1922 per cent from 1.2144, while 10-year swaps fell to 1.6625 per cent from 1.7100
