Australian Dollar Falls After Stevens Says Inflation to Slow

By Ron Harui

July 16 (Bloomberg) -- The Australian dollar fell from a 25-year high and two-year government bonds advanced after Reserve Bank of Australia Governor Glenn Stevens signaled interest rates may be high enough to keep inflation in check.

Australia's dollar snapped a four-day gain after Stevens told economists that the chances of ``keeping inflation low over the medium term are good,'' suggesting the RBA may have finished raising rates. The currency also declined as the yield premium on the nation's two-year debt compared with similar-maturity Treasuries narrowed 6 basis points to 4.17 percentage points.

``Interest rates are at a peak is the bottom line of the speech,'' said Matthew Johnson, an economist at ICAP Australia Ltd. in Sydney. ``The Australian dollar might go down, and that's what we're seeing immediately.''

The Australian dollar slipped to 97.78 U.S. cents at 2:10 p.m. in Sydney from 98.07 cents before the speech and an earlier high of 98.49 cents, the strongest since January 1983. The currency weakened 0.6 percent to 102.24 yen from 102.88 yen.

The RBA's outlook on inflation ``does involve a period of significantly slower growth in demand in Australia,'' Stevens said in a speech in Sydney today. ``We still expect inflation to fall back to 3 percent by mid-2010, and to continue declining gradually thereafter.''

Australia's benchmark interest rate is at a 12-year high of 7.25 percent, compared with 2 percent in the U.S. and 0.5 percent in Japan, making the country a popular destination for international investors seeking higher returns. The local currency, known as the Aussie, has risen the most among the 16 most-active currencies versus the U.S. dollar this year.

Traders increased bets that the RBA will lower its benchmark rate after Steven's speech. A Credit Suisse Group index based on interest-rate swaps showed the central bank will cut borrowing costs by 13 basis points in the next 12 months, compared with 2 basis points yesterday. A basis point is 0.01 percentage point.

Australian two-year government bond yields slid 10 basis points to 6.51 percent. Bond yields move inversely to prices.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net;