N.Z. Dollar Falls to 6-Month Low on Rate Cut; Aussie Declines

By Ron Harui and Candice Zachariahs

July 24 (Bloomberg) -- The New Zealand dollar fell to a six-month low after the central bank cut its benchmark interest rate by a quarter-percentage point to 8 percent, the first reduction in five years. The Australian dollar also declined.

New Zealand's dollar slid for a seventh day on speculation the Reserve Bank of New Zealand will keep lowering borrowing costs to boost economic growth, diminishing the allure of the nation's higher-yielding assets. Australia's dollar, known as the Aussie, slipped for a second day as the RBNZ's rate decrease spurred traders to add to bets the Reserve Bank of Australia will lower its benchmark of 7.25 percent.

``Further kiwi depreciation will occur,'' wrote Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney, in a research note, referring to the currency by its nickname. ``More interest-rate cuts by the RBNZ are expected in September.''

New Zealand's currency fell 1.3 percent to 74.15 U.S. cents at 4:40 p.m. in Wellington, near the lowest since Jan. 22 and from 75.16 cents late in Asia yesterday. Against Australia's dollar, the kiwi reached NZ$1.2952, the weakest since November 2000, before trading at NZ$1.2905. The currency dropped to 80.01 yen from 81.01 yen.

Australia's currency declined 0.8 percent to 95.74 U.S. cents from 96.47 cents late in Asia yesterday. It reached 95.73 cents, the lowest since July 10. The currency fell to 103.28 yen from 103.98 yen.

Rate Cut Surprises

The New Zealand dollar was the worst performer among the 16 most-active currencies against the U.S. dollar today as the central bank's rate reduction surprised most of the 15 economists in a Bloomberg News survey. Government bonds rose.

The kiwi has tumbled 9.8 percent since reaching 82.13 U.S. cents in March, the highest since being allowed to trade freely 23 years ago. The economy contracted in the first quarter, putting the nation on the brink of its first recession since 1998. Bets for further rate reductions may undermine demand for the local dollar, which offered a carry return of 28.3 percent the past two years, the third-best among the 16 major currencies.

New Zealand's 8 percent rate compares with 7.25 percent in Australia, 2 percent in the U.S. and 0.5 percent in Japan, making the South-Pacific nations' currencies popular 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 two. The risk is that currency moves erase those profits.

Economic Outlook

New Zealand's currency declined versus Australia's after RBNZ Governor Alan Bollard said he may cut rates again should inflation ease.

``Economic activity is likely to remain weak over the remainder of 2008,'' Bollard said in a statement in Wellington. ``Provided that the outlook for inflation continues to improve and there is no excessive exchange-rate depreciation, we would expect to lower rates further.''

Traders are betting the central bank will lower the rate to at least 6.75 percent in the next 12 months, a Credit Suisse Group index based on interest-rate swaps showed. Just four of 15 economists surveyed by Bloomberg last week predicted today's decision by the RBNZ. Eleven expected no change until the next review on Sept. 11.

Commodities Decline

The Australian dollar fell to the lowest in two weeks as Credit Suisse indexes showed traders added to bets for the RBA to reduce its benchmark by 25 basis points in the next 12 months, compared with 11 basis points yesterday.

The currency also weakened as the price of gold, the nation's third-most valuable commodity export, dropped the most in more than six weeks yesterday. Exports of raw materials contribute about 17 percent to Australia's economy.

``For commodity currencies, it appears the writing is on the wall for a sharp pull back,'' wrote London-based Stephen Koukoulas, head of global foreign exchange and fixed-income strategy at TD Securities Ltd., in a research note. ``A weaker commodities outlook will undermine support'' for the Aussie.

New Zealand's government bonds rose, pushing the yield on the 10-year note down 5 basis points to 6.13 percent. The price of the 6 percent security maturing in December 2017 climbed 0.368 to 99.054. A basis point is 0.01 percentage point.

Australian bonds advanced for a second day. The yield on the 10-year note fell 5 basis points to 6.40 percent. The price of the 5.25 percent security maturing in March 2019 gained 0.336, or A$3.36 per A$1,000 face amount, to 91.243.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net