The New Zealand dollar jumped about a quarter of an Australian cent, extending recent gains against its trans-Tasman counterpart, as investors were spooked by US President Donald Trump escalating his trade war with China.
The kiwi climbed as high as 93.68 Australian cents and recently traded at 93.52 cents, from 93.32 cents before reports Trump asked the US Trade Representative to identify US$200 billion of Chinese goods for additional tariffs, ratcheting up the tensions between the world's two biggest economies. The Australian dollar is seen as more vulnerable to China's woes given the nation's larger economic exposure to the Asian powerhouse. The kiwi fell about 10 basis points against the greenback, recently trading at 69.25 US cents, while the Aussie dropped about 25 basis points to 74.01 US cents.
Emerging market and commodity currencies have been on the back foot this week after China responded to US tariffs on US$50 billion of Chinese goods by targeting farm commodities and cars from the US for US$34 billion of tariffs and flagging a further US$16 billion of goods such as coal and oil that will face tariffs down the track.
Mark Johnson, senior dealer foreign exchange at OMF in Wellington, said the tit-for-tat retaliation between the heavyweight nations eroded investor sentiment, with trading adopting a risk-off tone.
"This is the whole thing with trade wars - where does it all stop?" Johnson said. "Equity markets didn't like it, so generally speaking this risk-off tone pervading markets will keep kiwi/US capped in the short-term anyway, and if the Aussie dollar comes under pressure there's no way we'll be immune to that."
The S&P/NZX 50 index fell 0.3 percent to 8,946.59 as at 12.55pm, following a broader selloff across Asia, and Wall Street's 'fear gauge' - the Chicago Board Options Exchange's Volatility index, or VIX - rose 32.8 percent to 12.31 in New York trading ahead of the escalating trade tensions.
The Australian dollar was already under pressure from weaker Chinese economic data, with figures this month showing fixed-asset investment in China in the first five months of the year rose 6.1 percent year-on-year, a record low, while growth in retail sales and industrial production slowed in May. Economists are predicting the pace of growth in Asia's biggest economy slowed to 6.5 percent this year, from a 6.9 percent pace in 2017.