ASB chief economist Nick Tuffley said a combination of fluctuating international finance and credit markets and the Reserve Bank catching most people by surprise by dropping the official cash rate (OCR) by 50 basis points this week, had caused the volatility.
Since Monday, the New Zealand dollar has shed more than 3c against the US dollar, and benchmark 90-day bank bills have fallen from 8.10 to 7.84.
At the close of trading last night, the kiwi was worth US65.37c, up 0.23c on morning trade and the 90-day bank bill was sitting at 7.81.
Mr Tuffley said markets had factored in a 25 basis point decline in the OCR, but when the Reserve Bank announced a 50-point decline, the rates were pushed lower.
"If we had got a 25-point decline, there would not have been much of a reaction."
The key now was the bank's October meeting, with many picking another 25-point drop, but equally there was a view the OCR could fall another 50 points, to stimulate the economy.
"If they just do 25 points, there will not be much of an impact, because term rates have already got that factored in. To get lending rates lower, there is a good argument that they could go 50 points," Mr Tuffley said.
The risk with a big decline was that it could be inflationary as imports became more expensive if the dollar dropped sharply.
He believed the exchange rate would continue to decline into next year.
