Australian, N.Z. Dollars Fall on Concern Economies Will Slow

By Ron Harui and Tracy Withers

July 2 (Bloomberg) -- The Australian and New Zealand dollars fell on concern growth in the nations will slow, backing the case for the Reserve Bank of Australia to keep interest rates on hold and New Zealand's central bank to cut them.

Australia's currency weakened for a second day before government reports on retail sales and building approvals that may add to signs the economy is cooling. New Zealand's currency also declined for a second day after Reserve Bank of New Zealand Governor Alan Bollard signaled the nation's economic expansion is slowing.

``Should today's reports on retail sales and building approvals indicate demand is continuing to moderate this could trigger a further paring of expectations for an RBA rate hike, weighing on the Australian dollar,'' John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney, said in a note to clients.

The Australian dollar fell 0.3 percent to 95.46 U.S. cents as of 10:54 a.m. in Sydney, from 95.73 cents late in Asia yesterday and a 25-year high of 96.68 cents touched June 30. The currency traded at 101.18 yen from 100.90 yen.

New Zealand's currency declined 0.6 percent to 75.76 U.S. cents, the biggest loss since June 23. The currency bought 80.36 yen from 80.35 yen late in Asia yesterday.

Home-building approvals in Australia may have fallen 3.4 percent in May from the previous month, the fourth decline this year, according to the median estimate of economists surveyed by Bloomberg News. Retail sales may have gained 0.1 percent in May, a separate Bloomberg survey showed. Both reports will be published at 11:30 a.m. Sydney time.

Rate Outlook

There is a 24 percent chance the RBA will raise interest rates by a quarter-percentage point to 7.5 percent by October, compared with 52 percent odds a week ago, according to probabilities implied by 30-day interest-rate tracking futures traded on the Sydney Futures Exchange.

Benchmark interest rates are 7.25 percent in Australia and 8.25 percent in New Zealand, compared with 2 percent in the U.S. and 0.5 percent in Japan, making the South Pacific 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 another with higher interest rates, earning the spread between the borrowing and lending rate. The risk is currency market moves erase those profits.

The New Zealand dollar slid the most in a week after RBNZ Governor Bollard said late yesterday in an interview with CentralBankNews.com that the economy was probably ``flat'' in the three months ended June 30. Twelve of 13 economists surveyed by Bloomberg expect he will cut rates by September.

`Weigh Negatively'

``Comments from Governor Bollard will continue to weigh negatively on the New Zealand dollar,'' said Philip Borkin, an economist at ANZ National Bank Ltd. in Wellington. ``There are less risky, relatively high-yield currencies to hold.''

There is a 27 percent chance New Zealand's central bank will lower its official cash rate at its next meeting July 24, compared with zero percent odds a month earlier, according to a Credit Suisse Group index based on interest-rate swaps.

``They will be cutting rates before too long,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world's largest custodial bank, with more than $23 trillion in assets under administration. ``We expect the kiwi to keep falling,'' he said, referring to the currency by its nickname.

Australian government bonds declined for a second day. The yield on the 10-year note rose 3 basis points to 6.53 percent, according to data compiled by Bloomberg. The price of the 5.25 percent bond due March 2019 fell 0.234, or A$2.34 per A$1,000 face amount, to 90.265. A basis point is 0.01 percentage point.

New Zealand's government debt was little changed with the 10-year bond yield holding at 6.34 percent.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Tracy Withers in Wellington at twithers@bloomberg.net.
Last Updated: July 1, 2008 21:14 EDT