Australia Dollar Falls Most in Month as Yield Advantage Narrows

By Ron Harui and Candice Zachariahs

July 23 (Bloomberg) -- The Australian dollar fell the most in more than a month as the yield advantage of the nation's two- year government bonds over similar-maturity U.S. Treasuries narrowed to the least since January.

The currency, also known as the Aussie, slipped to its lowest in almost a week after U.S. Treasury Secretary Henry Paulson voiced support for the dollar and Federal Reserve Bank of Philadelphia President Charles Plosser said the Fed should raise interest rates. Losses were limited after Australia's inflation quickened more than forecast by economists in the second quarter.

``The Aussie found a little bit of negativity overnight on the back of some dollar strength,'' said Glenn Wittingslow, head of foreign-exchange options at St. George Bank Ltd. in Sydney. ``You had a number of commentaries out in support of the U.S. dollar.''

Australia's dollar fell 0.8 percent, the most since June 12, to 97.05 U.S. cents at 12:05 p.m. in Sydney, from 97.81 cents late in Asia yesterday. It earlier reached 96.86 cents, the weakest since July 18. The currency traded at 104.23 yen from 104.07 yen.

The Aussie fell as the yield differential between two-year Australian and U.S. government debt narrowed to 3.90 percentage points, the least since Jan. 7. The U.S. central bank should raise interest rates ``sooner rather than later,'' Philadelphia Fed President Plosser said in a speech yesterday in King of Prussia, Pennsylvania.

Gold, Commodities

The local currency weakened against 13 of the 16 most- traded currencies after a rebound in the U.S. dollar and falling energy costs reduced demand for gold, Australia's third-largest export earner, as a hedge against inflation.

Gold futures for August delivery fell 1.6 percent to $948.50 in New York, the lowest closing price since July 10. Nickel prices may average as much as 46 percent lower this year, India's largest stainless steel producer Jindal Stainless Ltd. said yesterday.

The UBS Bloomberg Constant Maturity Commodity Index fell 1.3 percent to 1,552.29, the lowest since June 5. Exports of raw materials contribute about 17 percent to Australia's economy.

Losses in Australia's dollar were limited after the Bureau of Statistics said in Sydney today the consumer price index rose 1.5 percent from the first quarter, when it climbed 1.3 percent. The median estimate of 22 economists surveyed by Bloomberg News was for a 1.3 percent gain. Prices increased 4.5 percent from a year earlier.

``That's still uncomfortably high for the Reserve Bank of Australia,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``It's certainly a reminder that it's going to be very hard to get them to look at easing. On balance, it's mildly Aussie positive.''

Australian government bonds advanced, pushing the yield on the 10-year security down 4 basis points to 6.42 percent, according to data compiled by Bloomberg. The price of the 5.25 percent note maturing in March 2019 rose 0.288, or A$2.88 per A$1,000 face amount, to 91.054. A basis point is 0.01 percentage point.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.