Currency concerns are set to dominate the early part of the week with the expectation of a big rate cut on Thursday from the Reserve Bank likely to weigh heavy on the New Zealand dollar.
Four central banks, including the Reserve Bank of Australia today and the New Zealand Reserve Bank, are expected to cut their central lending rates this week.
Economists, who last week put the New Zealand cut at 1%, taking the official cash rate to 5.5%, were yesterday calling for a 1.5% cut.
ANZ-National Bank chief economist Cameron Bagrie said the New Zealand dollar managed to push higher last week by tracking United States equity markets, which managed to summon a pre-Thanksgiving weekend rally.
"As we have seen of late, such rallies could prove to be short-lived. The economic data flow internationally remains very poor, but markets appear to be cheering the firm action being taken by various governments in the form of substantial fiscal stimulus."
ANZ-National Bank viewed the move to the higher New Zealand dollar last week as part of a technical rebound, not the start of a new upward trend, he said.
A rebound towards US56c to US58c was possible, but he believed the dollar would remain firmly on a downward trend.
The expectations of a 1.5% cut in the OCR would see New Zealand's yield advantage narrow further, taking away the only real attraction of owning the New Zealand currency.
After gaining surprising strength against the Australian currency, the New Zealand dollar had finally moved down, Mr Bagrie said.
"Given the fact that the data flow in New Zealand continues to underperform and Australia has run trade surpluses in recent months compared to New Zealand's large deficits, we can expect the NZ dollar-Australian dollar cross to keep heading down."
The New Zealand dollar opened up against the euro yesterday but down against the United States currency as investors worried about the continuing financial crisis looked to the greenback as a safe haven.
The Australian currency struggled for most of the offshore session as the biggest slide in the European Union's measure of inflation since euro zone consumer price index (CPI) records began in 1997 hurt the euro, boosting the US dollar.
"The soft data in the euro zone weighed on the euro," Bank of New Zealand currency strategist Danica Hampton said from Wellington.
"It was really a case that the euro fell against everything . . . That filtered through to US dollar strength.
"Heavy demand for the US dollar saw the Australian dollar sold quite sharply."
The EU's Eurostat statistics agency said that first estimate CPI in the 15-member euro zone had fallen to an annual pace of 2.1% in November, down from 3.2% in October.
Ms Hampton said there was no doubt the New Zealand Reserve Bank would cut rates aggressively.
"We believe 1.5% is now likely and certainly nothing less than three figures is being contemplated. Above all, it's the inflationary outlook that drives the Reserve Bank's monetary policy decision making and by most measures inflationary pressures are dissipating rapidly."
Aggressive rate cuts are also expected by other central banks this week.
Globally, the question remained as to whether the "bevy of aggressive rate cuts" would be enough to see sharemarkets bounce and the US dollar slide or whether it would seen as a warning of how bad things were and push the US dollar higher.
She suspected it would be seen as a warning, which would push the kiwi lower through the week.
