The New Zealand dollar was the worst performing currency overnight, as investors switched to so-called 'safe haven' assets on concern China's government is reducing its support for banks, which could stymie growth in the world's second largest economy.
The kiwi dropped to 83.78 US cents at 8am in Wellington, from 84.58 cents at the 5pm market close yesterday, making it the worst performer overnight of currencies tracked by Reuters. The trade-weighted index fell to 77 from 77.59 yesterday.
Investors favoured so-called safe haven currencies such as the yen and the Swiss franc, and dumped the higher risk kiwi and Aussie after a spike in China's short-term money-market interest rates and reports that the Chinese government is clamping down on Chinese bank lending.
"There's a little bit of fear that you are going to see the Chinese government clamping down on the Chinese banks in terms of their lending and hence squeezing the banks on the default front and also the property market within China," said Stuart Ive, senior client advisor, foreign exchange and derivatives, at OM Financial. "That saw risk get really hit yesterday, and the New Zealand dollar was the worst hit."
The People's Bank of China failed to inject cash for a second day yesterday amid regulators concern that loose liquidity might be fuelling risky credit expansion. China's biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults, Bloomberg News reported.
"The Chinese, like the rest of the world, have been stimulating their economy from around 2009 and this may be the first warning sign that they are going to start pulling back on that with the subsequent consequences of that on the immediate economy, ie, the housing market," said OM Financial's Ive.
Today, investors will be eyeing a report on Chinese manufacturing for a gauge on how the economy is tracking.
The New Zealand dollar dropped to 81.53 yen from 82.49 yen yesterday and declined to 74.72 Swiss francs from 75.65 franc.
The kiwi was little changed at 87.09 Australian cents from 87.16 cents yesterday ahead of a speech by Reserve Bank of Australia deputy governor Philip Lowe at 4pm New Zealand time today on 'Investment and the Australian Economy'.
In New Zealand today, traders will be eyeing a report on the nation's trade balance for September, scheduled for release at 10:45am.
The local currency slipped to 60.79 euro cents from 61.34 cents yesterday after European Central Bank president Mario Draghi said he wants to put in place a tougher stress test for banks.
The kiwi slipped to 51.80 British pence from 52.04 pence yesterday after the Bank of England minutes of this month's meeting confirmed officials voted unanimously to leave the benchmark interest rate unchanged at 0.5 percent and maintain asset purchases.