The New Zealand dollar is heading for a 2.4 per cent drop this week after a slump in milk powder prices fuelled calls for the Reserve Bank to cut interest rates more aggressively.
The Kiwi fell to US65.37 cents at 5pm from 71.29 cents on Friday in New York last week. It was up from 65.09 cents at 8am and 65.17 cents on Thursday.
The trade-weighted index is heading for a 2.7 per cent weekly slide, and was at 69.39 at 5pm from 69.26 on Thursday.
New Zealand's currency dropped more than one US cent on Thursday after whole milk powder prices slumped at the GlobalDairyTrade auction.
This sparked fears about the country's rural economy, and as inflation remains tame, the Reserve Bank has room to cut interest rates without pushing up consumer prices.
NZX Milk Futures indicate dairy prices will fall further at their next auction in a fortnight, and traders are pricing in an outside chance the Reserve Bank will cut the official cash rate by half a percentage point next week.
The slump in milk prices 'is a bit of a disaster - it's really going to back the Reserve Bank into a corner - if they don't do enough the Kiwi's not going to provide the buffer that is required,' said Martin Rudings, senior dealer foreign exchange at OMF in Wellington.
'The debate is whether it's a quarter-point (cut) or a half - if it's a half the Kiwi's going down to 63 US cents.'
Mr Rudings favours a 50 basis point cut to the OCR next week.
US inflation data on Friday will be watched to see whether it gives the Federal Reserve scope to start raising interest rates, but traders' attention will return to New Zealand for the Reserve Bank's policy review on Thursday.
The local currency fell to 88.14 Australian cents from 88.53 cents on Thursday, and increased to 4.0601 Chinese yuan from 4.0466 yuan.
It gained to 60.01 euro cents from 59.62 cents, and was little changed at 41.81 British pence from 41.71 pence. It advanced to 81.12 yen from 80.69 yen.
