The New Zealand dollar tumbled as much as 2 percent from a 22-year high versus the US dollar on Monday after selling by the Reserve Bank of New Zealand, but the impact on funding currencies such as the yen was limited.
The euro held near Friday's two-month low against the dollar, set after a rally in US Treasury yields, although it pared losses after hawkish comments from a European Central Bank policymaker.
The RBNZ intervention to curb the soaring New Zealand dollar came four days after the central bank surprised markets by raising its key interest rate, which was already the highest in the industrialised world, to 8.0 percent.
Analysts say the intervention increased the risk of popular carry trades, but the limited effect on funding currencies suggested that it was insufficient to dampen investor risk appetite. Investors in carry trades borrow in low yielding currencies to fund purchases in high yielding assets,
"The RBNZ did the intervention when liquidity was very low and whether they are prepared to do it in a stronger market when there is more money in play is not clear," said Martin McMahon, FX strategist at Credit Suisse in Zurich.
"Maybe the market is not convinced that the whole carry trade story is unravelling. It will take more than one temporary one-off intervention for investors to realise that carry trades are no longer a one way street."
RBNZ selling helped to drive the New Zealand dollar down to US $0.7482, down more than 2 percent from Friday's peak of US $0.7638 - the kiwi's strongest since it was floated 22 years ago. The kiwi was on track for its biggest one day loss since March 2006.
The Australian dollar slipped versus the greenback and the yen in sympathy with the kiwi. Australia was closed for a national holiday. The euro was down 0.2 percent at $1.3341, closing in on a two-month low around $1.3320 set on Friday, when the dollar rallied as the benchmark US Treasury yield jumped to its highest in around five years.
The euro was down 0.2 percent at 162.45 yen while the dollar was steady at 121.75 yen. The euro pared losses after European Central Bank Governing Council member Nout Wellink told Market News International that the ECB has not yet reached the peak of its interest rate cycle.
ECB Governing Council member John Hurley said the central bank will act as needed to head off inflation risks. The ECB raised rates to 4.0 percent last week and is expected to hike at least once more by the end of this year. Analysts say still buoyant risk appetite, supported by gains in Japanese, Chinese and European shares, could mean buyers dip their toe back into the New Zealand dollar, barring any further action from the central bank.
But JP Morgan said carry trades could deal a blow from developments in the fixed income market. "Rising long-term yields along with central bank rate hikes have heightened market fears of a global liquidity withdrawal with an adverse impact to carry trades," it said in a note to clients.