The Reserve Bank of Australia has stepped in with A$1.0bn (US $610m) to stop the crisis.

"It's an Armageddon scenario," said David de Garis of the Australia and New Zealand Bank. "The Reserve Bank may have to hike rates to stop the Australian dollar becoming a casualty like the won or ringgit."

American currency speculators seem to be targeting the Antipodean currencies in the hope of profiting from the weakness of Far Eastern currencies.

By 0500 GMT Friday the Australian dollar was pressing against the psychological barrier of $0.60, its lowest level in 12 years, while the New Zealand dollar closed at US $0.5172, just above its 5 year low.

The NZ economy could be hit by higher interest rates

The New Zealand currency plunged when Moody's Investors Service said it might downgrade the country's debt rating. It said the country's balance of payments deficit was spiralling out of control.

The Bank of New Zealand has forecast that the deficit, hit by declining trade with Asia, could balloon to 8.2% of GDP this year. Bank Governor Don Brash has said he is "uneasy" over the deficit.

In Australia, the trade deficit has also increased by 33% in the first quarter of 1998, and the dollar is off by 21% since the Asian crisis broke last May.

Speculation over an Australian interest rate cut also contributed to the sell-off.

But Reserve Bank of Australia governor Ian McFarlane said that was "very unlikely" and appealed to the markets to restrain their speculation. "Overshooting would be in no one's interest," he said.

With A$20bn (US $12bn) in reserves, the bank is clearly ready for a fight. But it may have a tough time beating the hedge funds which have access to billions of dollars of credit.

"The market will be quietly adding up what the RBA spends, waiting for it to run low on ammunition," commented John Kyriakopoulos of J.P. Morgan.

Interest rates in New Zealand have already risen sharply in response to the currency crisis.