New Zealand's central bank yesterday took the unprecedented step of intervening in the currency market to try to stem a rally that has seen the kiwi dollar rise to its highest level since its 1985 float.

The Reserve Bank of New Zealand (RBNZ) confirmed that it had for the first time used a special currency fund to sell kiwi dollars, without specifying the amount.

Alan Bollard, the bank's governor, said that the kiwi dollar had reached a level that was "exceptional and unjustified in terms of the economic fundamentals".

The kiwi dollar has traditionally been one of the main targets of the global carry trade, in which investors borrow cheaply in the currencies of countries with low interest rates to buy into high-yield currencies.

Japanese investors have been among those focusing on the yield spread between their domestic market and New Zealand, boosting the volume of yen-funded carry trades and the issuance of uridashi bonds, which are sold to Japanese retail investors.

The move caused the kiwi dollar to fall back nearly 2 per cent to about US$0.75 (€0.56), after climbing to US$0.764 on Friday, its highest level since the RBNZ allowed the currency to float freely in 1985. The kiwi dollar lost 1.7 per cent against the yen.

The move came after the central bank last week raised its key cash interest rate by 25 basis points to 8 per cent, its highest since 1998 and higher than in any other large industrialised economy.

In an April report, the Organisation for Economic Co-operation and Development underlined the country's vulnerability to the carry trade by warning that, should foreign investors move out of kiwi dollar assets, it would lead to "a large and potentially disorderly fall in the exchange rate".