The New Zealand dollar has slipped by 2% after the US central bank signalled it may start reducing its stimulus measures soon if the American economy continues to improve.
Pressed about when its bond buying programme could start being reined in, US Federal Reserve chairman Ben Bernanke told Congress on Wednesday said it could happen in the next few meetings, but only if the data shows economic gains can be sustained.
Westpac Bank currency strategist Imre Speizer says that caught financial markets by surprise and the New Zealand dollar fell about 1.75 cents to US80.4 cents.
Mr Speizer says it is the first time the Fed chairman had suggested stimulus measures could be reduced in the next few months, which is why caused "such a panic" in the marketplace.
He says the direction of the New Zealand dollar is now dependent on key US economic data and could be volatile in the next few months due to investors trying to gauge the sustainability of the American recovery.
At 5pm on Thursday the dollar was buying US80.26 cents.
Minutes from the Fed's most recent meeting were released on Wednesday, showing the threshold remained relatively high, Reuters reports.
The minutes said a number of officials expressed a willingness to taper bond purchases as early as the upcoming meeting on June 18-19 if there were signs of "sufficiently strong and sustained growth."
But views differed both on how to gauge progress and on how likely it was that that threshold would be met.
Mr Bernanke told Congress monetary policy was providing significant benefits, citing strong consumer spending on vehicles and housing, as well as increases in household wealth.
In his evidence to the Joint Economic Committee, he said the stimulus has also helped offset deflationary pressures and kept inflation from falling even further below the Fed's 2% longer-run objective.