Australian Dollar Falls on Concerns Banking Losses Will Spread

By Ron Harui

July 28 (Bloomberg) -- The Australian dollar fell after Australia & New Zealand Banking Group Ltd. set aside more funds for bad debts linked to U.S. credit-market losses. The New Zealand dollar was little changed.

Australia's currency dropped to a two-week low after ANZ said provisions for bad debts are likely to be about A$1.2 billion ($1.1 billion) in the current half. National Australia Bank Ltd. last week set aside an additional A$830 million for potential mortgage-related losses. New Zealand's dollar may weaken as the country's three-year swap-rate advantage over the U.S. narrowed to a 10-month low.

``The Australian dollar is looking vulnerable,'' said Tony Morriss, a currency strategist at ANZ in Sydney. ``The run of announcements highlights the risks that losses from the U.S. are spreading.''

Australia's dollar dropped to 95.34 U.S. cents as of 11:25 a.m. in Sydney from 95.62 cents late in New York on July 25. It earlier reached 95.27 cents, the lowest since July 9. The currency traded at 102.96 yen from 103.11 yen.

New Zealand's dollar bought 74.20 U.S. cents from 74.18 cents late last week, when it touched 73.87 cents, the weakest since Jan. 22. The currency was at 80.08 yen from 80.01 yen.

The Australian dollar extended its loss against the U.S. dollar in the past five days to 1.6 percent, the second-worst performance among the 16 most-traded currencies behind New Zealand's dollar, after Melbourne-based ANZ said in a statement profit will drop as much as 25 percent on bad debts.

Credit-Market `Deterioration'

``As the deterioration in global credit markets continues and the slowing of the global economy plays out in Australia and in New Zealand, there are flow-on effects for our'' business, ANZ's Chief Executive Officer Mike Smith said.

Australia's dollar traded near its lowest in more than a week versus the yen after John Stewart, chief executive officer of National Australia Bank, said yesterday losses from the U.S. housing slump may more than triple.

The world's largest banks and securities firms have posted about $468 billion in losses and writedowns since the subprime crisis started last year, Bloomberg data shows. Australian companies including Babcock & Brown Ltd. and Allco Finance Group Ltd. are selling assets to cope after credit-market turmoil boosted debt costs.

Six months after correctly identifying the Australian dollar as one of the best bets in the foreign exchange market, the biggest investor in the nation's debt says the rally is coming to an end.

`Rally is Finished'

Daiwa Asset Management Co., which holds 4 percent of the government's bonds, expects the currency to close the year at $1 after earlier forecasting a surge to $1.10.

``The rally is finished as the best days for the economy may be over,'' said Tsutomu Komiya, a money manager in Tokyo at Daiwa, a unit of Japan's second-largest brokerage. Daiwa, which manages the equivalent of $93 billion, isn't buying the currency because cash flowing into Australia funds ``has stopped in recent days,'' he said.

The New Zealand dollar may extend its five-day 2.4 percent decline versus the U.S. dollar as the difference between three- year New Zealand and U.S. swap rates narrowed to 3.29 percentage points today, the least since Sept. 18.

``Further narrowing of interest-rate differentials will likely undermine the local currency going forward,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington.

RBNZ Rate Bets

The currency fell 2.6 percent last week after Reserve Bank of New Zealand Governor Alan Bollard cut the official cash rate a quarter-percentage point to 8 percent. Bollard, in a July 24 statement, said further rate cuts are likely unless there is ``excessive depreciation'' in the currency or a larger-than- expected surge in inflation.

The chance of a quarter-point cut at a review in September is 100 percent, suggesting it's a certainty, according to a Credit Suisse Group index based on interest-rate swaps.

Australian two-year government debt rose for a fourth day. The yield on the two-year bond fell 4 basis points, or 0.04 percentage point to 6.40 percent. The price of the 5.25 percent bond maturing in August 2010 rose 0.074, or A$0.74 per A$1,000 face amount, to 97.823.

New Zealand's government bonds fell, pushing the yield on the 10-year note up 2 basis points to 6.12 percent. The price of the 6 percent security maturing in December 2017 declined 0.169 to 99.131. Yields move inversely to prices.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Chris Young in Sydney at cyoung12@bloomberg.net.