The New Zealand dollar rallied by more than one US cent and then quickly retreated after the US Federal Reserve this morning opted to leave its official rate unchanged within a zero to 0.25 per cent range.
In one of the most keenly watched decisions in recent years, the Fedsaid it had decided not to hike rates because of heightened uncertainty in world markets.
"Recent financial and economic developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the Federal Open Market Committee said in a statement.
The Fed's rate call prompted weakness in the US dollar, which flowed through into strength in the New Zealand dollar - which rallied by more than US1c - and to other currencies.
The Kiwi went from US63.14c just before the decision to US64.46c just after. Concerns about the global commodities outlook, outlined by the Fed, then quickly drove the local currency back down to US63.52c.
"It was US dollar negative, which was why we saw the New Zealand dollar rally," Sam Tuck, senior foreign exchange strategist at ANZ Bank, said.
Extreme volatility on Chinese share markets has upset confidence in other markets, and there are concerns that an economic slowdown in China will affect demand for world commodities prices.
The US central bank has kept rates at near zero since December 2008 following the collapse of investment bank Lehman Brothers and the onset of the Global Financial Crisis.
Financial markets have for two years been closely wanting the Fed for clues as to its next move as the US tries to shake off a post-Global Financial Crisis hangover.
The prospect of a Fed rate hike has been a significant driver of the New Zealand dollar over the past year at least. When the Fed finally moves, the New Zealand dollar is expected to come under downward pressure.
ANZ Bank said in a commentary that the US Federal Reserve meeting was billed as the "must see event" of the decade, "but in the end it was a bit of a fizzer".
However, Fed chairwoman Janet Yellen said in a news conference that a rate hike in October was a possibility.
BNZ said it was clear that the Fed's focus would be on global developments, as well as the path of the USD and oil prices.
