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 nations' central banks will cut interest rates in coming months.
Australia's currency extended a decline from near the strongest in 25 years as Reserve Bank of Australia Governor Glenn Stevens signaled yesterday the nation's 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 almost nine months.
``The governor's speech 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 0.2 percent to 97.62 U.S. cents as of 4:42 p.m. in Sydney from 97.84 cents late in Asia yesterday, when it reached 98.49 cents, the highest since 1983. The currency bought 102.67 yen from 101.63 yen.
New Zealand's dollar declined to 77.16 U.S. cents from 77.21 cents in Asia yesterday, when it touched 77.60 cents, the strongest since June 5. The currency traded at 81.15 yen from 80.21 yen.
The Australian dollar weakened as traders added to bets the central bank will reduce its 7.25 percent benchmark rate as 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 12 basis points in the next 12 months. At the start of this week, the probability was for a 2 basis-point increase.
Yield Premium
The New Zealand dollar, known as the kiwi, fell as the yield premium on 10-year bonds over similar-maturity Treasuries shrank to 2.06 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 1.33 percentage points in the next 12 months, compared with a forecast of 1.31 percentage points at the start of the month, according to a separate Credit Suisse index.
`Pretty Conservative'
Losses in the Australian and New Zealand dollars were limited on speculation Japanese investors will buy the currencies, seeking higher returns than they can get at home.
``There are some structural pressures coming on the yen again, partly due to Japanese investors still hunting the high- yielding currencies,'' said Thomas Harr, a currency strategist at Standard Chartered Plc in Singapore. ``They prefer the Aussie and the kiwi because they're pretty conservative and they favor the liquid markets.''
Benchmark rates of 7.25 percent in Australia and 8.25 percent in New Zealand compare with 0.5 percent in Japan, making the two currencies popular targets for so-called carry trades.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.
Yen sales by Japanese individual investors on the Tokyo Financial Exchange reached the highest since August for a second day yesterday as gains in the yen made higher-yielding assets abroad cheaper.
Housewives, Pensioners
Housewives, pensioners and businessmen accelerated purchases of foreign currencies as the yen rose to the highest since May 27 against the dollar.
Net short positions on the yen against seven major currencies, including the U.S. dollar and the Australian dollar, rose to 362,619 contracts among so-called mom-and-pop traders yesterday, the highest since Aug. 14, data showed today.
The contracts are denominated in 10,000 units of the foreign currency. A short position is a bet an asset will fall.
Australian government bonds rose, pushing the yield on the 10-year note down 2 basis points to 6.31 percent. The price of the 5.25 percent security due March 2019 climbed 0.135, or A$1.35 per A$1,000 face amount, to 91.872.
New Zealand's 10-year yield fell 1 basis point to 6 percent. 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.
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