Australia, N.Z. Dollars Fall as Traders Raise Bets on Rate Cuts

By Ron Harui and Candice Zachariahs

July 17 (Bloomberg) -- The Australian and New Zealand dollars fell for a second day as investors added to bets the central banks will reduce interest rates in coming months.

Australia's currency dropped from near a 25-year high as Reserve Bank of Australia Governor Glenn Stevens signaled yesterday that 12-year-high borrowing costs are high enough to curb inflation. New Zealand's currency slid from a six-week high as the difference in yield between 10-year New Zealand and U.S. government debt narrowed to the least in nine months.

``The governor's speech yesterday has got people wondering about the Reserve Bank cutting rates,'' said David Watt, a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada's largest bank. ``That's curtailed some of the bullishness for the Aussie,'' he said, referring to the currency by its nickname.

Australia's dollar fell 0.3 percent to 97.58 U.S. cents at 10:47 a.m. in Sydney from 97.84 cents late in Asia yesterday. The currency bought 102.51 yen from 101.63 yen yesterday.

New Zealand's dollar declined to 77.16 U.S. cents from 77.21 cents late in Asia yesterday. The currency traded at 81.08 yen from 80.21 yen.

The Australian dollar weakened as traders added to bets the central bank will reduce its 7.25 percent benchmark interest rate as RBA's Stevens said the chances of ``keeping inflation low over the medium term are good.''

A Credit Suisse Group index based on interest-rate swaps shows investors expect the RBA will cut borrowing costs by 10 basis points in the next 12 months. The probabilities were for a 2 basis point increase at the start of the week.

Yield Premium Drops

The New Zealand dollar fell as the yield premium on 10-year New Zealand government bonds over similar-maturity Treasuries dropped to 2.05 percentage points, the lowest since Oct. 31, and as traders raised wagers on a central bank rate reduction.

``The Reserve Bank of New Zealand will be cutting rates in the coming months,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. ``The New Zealand dollar looks top heavy.''

Traders are betting the RBNZ will lower its 8.25 percent benchmark rate by 1.39 percentage points in the next 12 months, compared with 1.35 percentage points yesterday, according to a Credit Suisse Group index based on interest-rate swaps.

Australian government bonds fell, pushing the yield of the 10-year note up 2 basis points, or 0.02 percentage points, to 6.35 percent. The price of the 5.25 percent bond due March 2019 dropped 0.166, or A$1.66 per A$1,000 face amount, to 91.571.

New Zealand's government bonds were mixed. The yield on the 10-year note declined 1 basis point to 5.99 percent, and the three-year bond yield rose 1 basis point to 6.08 percent. Yields move inversely to prices.

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