The ongoing market panic about global growth may end up pushing back the Federal Reserve interest rate rises.
But even in that scenario, the United States dollar is set to rise, BNZ currency strategist Raiko Shareef says.
The plunge in US bond yields last week and the subsequent near-complete reversal would rank among the most memorable market moves in recent times.
There was carnage across other financial markers and the big winner of the day was volatility, Mr Shareef said.
''For us, the violent moves signified a capitulation of hastily-built US dollar long positions which the market had piled into only recently.
"The market has pushed out its expectations for a Fed funds rate [FFR] hike, with the September 2015 meeting now only attracting 36% odds for the first hike, down from more than 70% two months ago.''
The BNZ had a long-held ''relatively aggressive, bullish'' US dollar view which had only recently borne fruit after a frustrating first half to 2014, Mr Shareef said.
The Bloomberg Dollar Spot Index gained 7.1% in the third quarter of this year after having stagnated for the first half of the year.
The investor panic of recent days had not seen the BNZ change its views.
There were three possible scenarios for the Fed policy outlook and only the least likely of those would be associated with US dollar weakness, he said.
The scenarios were. -
(1) The Fed remained on course to begin FFR hikes in the second quarter of next year, also the BNZ forecast.
(2) The Fed delayed FFR rises due to global uncertainty.
(3) Interest rate rises were delayed by the Fed due to US-specific issues.
The third scenario was the least likely and the tone of US data would support that hypothesis, Mr Shareef said.
But in a scenario one versus scenario two situation, consideration would have to be given to which one would result in larger US dollar gains.
''Intuitively, it would have to be the first scenario, where a growing US interest rate advantage attracts capital inflow.
"But one could easily make the case the US dollar would strengthen just as strongly in an environment where it was the only attractive option - against the unappealing prospects of other major currencies.''
Mr Shareef picked the first scenario to deliver the greatest US gains, but only just. Should US interest rates push higher, it should attract Japanese investors, who were being encouraged to look abroad for yield.
All of those predictions translated into a bearish view for the New Zealand dollar.
The BNZ was retaining its end-of-year target of US78c and an end-of-2015 target of US73c.
