By Ron Harui and Candice Zachariahs
July 30 (Bloomberg) -- New Zealand's dollar fell to a 10- month low on concern U.S. subprime-mortgage losses will spread to the South Pacific nation, increasing the chance the central bank will cut interest rates further this year.
The local dollar fell for a third day after New Zealand Guardian Trust Co. suspended investments and withdrawals from one of its funds, damping optimism the financial sector will weather the global credit-market crisis. Traders are betting the Reserve Bank of New Zealand will lower its benchmark by 1.32 percentage points in the next 12 months, up from 1.29 points on July 24 when the central bank lowered rates, a Credit Suisse Group index showed.
``The kiwi has been on a slow protracted decline since the RBNZ eased last week,'' said John Body, head of financial markets at ANZ National Bank Ltd. in Auckland, referring to the currency by its nickname. ``We don't see any reason to say that's not going to continue.''
New Zealand's dollar fell 0.2 percent to 73.89 U.S. cents as of 12:17 p.m. in Wellington, from 74.06 cents late in Asia yesterday. It earlier touched 73.47 cents, the lowest level since Sept. 26. The currency bought 79.82 yen, from 79.76 yen.
The kiwi has weakened 3.3 percent this month, the worst performer of the 16 most-traded currencies versus the U.S. dollar, on speculation further rate reductions will make the currency less attractive to overseas investors. The RBNZ lowered its official cash rate to 8 percent on July 24, from 8.25 percent, and said further cuts were likely.
Carry Trades
New Zealand's benchmark interest rate compares with 2 percent in the U.S. and 0.5 percent in Japan, making the currency a favorite target 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 borrowing and lending rate. The risk is currency market moves erase those profits.
Guardian Mortgage Fund, which lends to New Zealand property owners, said its suspension of investment and withdrawals affects about NZ$249 million ($184 million) of funds. The decision was taken to protect its 3,700 investors and the fund will continue to pay dividends, manager New Zealand Guardian Trust said in a statement yesterday. The amount of cash available to meet withdrawals had fallen to less than 5 percent of the fund's value, it said.
``Poor liquidity is a feature of today's markets,'' said Sean Carroll, managing director of Auckland-based Guardian Trust, a wholly owned unit of Suncorp-Metway, Australia's third-largest general insurer. ``We need to manage liquidity requirements very closely in funds such as these where the assets cannot be converted to cash quickly.''
New Zealand's government bonds were little changed. The benchmark 10-year note yielded 6.17 percent and the yield on the three-year security held at 6.22 percent, according to data compiled by Bloomberg.
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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