Australian Dollar Falls Versus Yen; Investors Pare Carry Trades

By Candice Zachariahs

July 8 (Bloomberg) -- The Australian dollar fell the most in a week against the yen as lower stocks prompted investors to pare holdings of higher-yielding currencies funded in Japan.

The local dollar, a favorite of so-called carry trades, dropped against all 16 of the most-traded currencies as the S&P 500 Financials Index declined to a five-year low on concerns U.S. home-mortgage financing companies Freddie Mac and Fannie Mae will be forced to raise more capital. Australia's currency also slid for a third day against the U.S. dollar before the release of a business confidence report in Sydney.

``Worsening investor-risk appetite appeared to weigh on the Australian dollar, as investors trimmed carry trades,'' wrote John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney, in a note to clients.

The Australian dollar fell 0.7 percent to 102.23 yen at 10:10 a.m. in Sydney, from 102.91 yen in late Asian trading yesterday. It declined to 95.50 U.S. cents from 95.76 cents.

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 borrowing and lending rate. The risk is that currency market moves erase those profits.

Australia's dollar, known as the Aussie, is a target of the strategy because the nation's benchmark interest rate of 7.25 percent compares with 0.5 percent in Japan.

``Rising risk aversion with volatility and losses on the U.S. stock market hit the Aussie quite hard,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney.

Business Confidence

In June, the business confidence index released by National Australia Bank came in below zero, indicating those expecting their industry to deteriorate outnumbered optimists for the fifth straight month. The report is due at 11:30 a.m. in Sydney.

The currency fell yesterday as jobs advertised in newspapers and on the Internet fell by the most in almost two years, according to an Australian & New Zealand report.

Australian government bonds were little changed, keeping the yield at 6.35 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.004, or A$0.04 per A$1,000 face amount, to 91.568. Bond yields move inversely to prices.

To contact the reporter on this story: Candice Zachariahs in New York at czachariahs1@bloomberg.net.