Australian Dollar Declines as Stock Slump Deters Carry Trades

By Chris Young

June 27 (Bloomberg) -- The Australian dollar fell the most in seven weeks against the yen as a slump in stocks encouraged investors to pare holdings of higher-yielding currencies funded in Japan.

The currency ended a three-day advance against the U.S. dollar and yen as the Standard & Poor's 500 Index tumbled the most in three weeks, sapping demand for so-called carry trades. Australia's dollar fell from a seven-month high against Japan's currency as U.S. stocks headed for their worst June since the Great Depression on concern credit-market writedowns and record oil prices will weaken the economy.

``Risk-aversion and carry-trade unwinding was the dominant theme,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``We suspect that the Australian dollar will be pressured into month-end.''

The Australian dollar slid 1.2 percent to 102.20 yen as of 8:43 a.m. in Sydney compared with 103.44 yesterday in late Asian trading yesterday. The currency traded at 95.61 U.S. cents from 95.99 yesterday.

The Australian dollar is a favorite of carry trades because the nation's 7.25 percent benchmark interest rate compares with 0.5 percent in Japan. In the strategy, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them. The risk is that exchange rate changes will wipe out the returns from the interest-rate advantage.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net.