By Aaron Pan and Tracy Withers
Aug. 29 (Bloomberg) -- The Australian dollar headed for its biggest monthly loss in 22 years, on speculation the nation's interest-rate advantage over the U.S. will narrow. New Zealand's dollar was poised for a third monthly loss.
The currencies weakened after a government report showed yesterday the U.S. economy grew faster than economists expected in the second quarter. Australia's dollar, known as the Aussie, is the worst performer of the 16 most-traded currencies in August as traders bet the central bank will lower interest rates next week for the first time in seven years and the yield premium of the nation's bonds shrank.
``The central bank is on a dovish stance and has left the door open for future rate cuts,'' said Craig Chan, a currency strategist at Lehman Brothers Holdings Inc. in Singapore. ``There's been a shift in expectations and the Aussie dollar is looking very overvalued.''
The Australian dollar declined to 86.19 U.S. cents as of 4:50 p.m. in Sydney, compared with 86.65 cents in late Asian trading yesterday and 94.23 cents at the end of July for an 8.7 percent monthly decline, the most since July 1986.
New Zealand's currency, know as the kiwi, bought 70.31 U.S. cents from 70.49 cents yesterday and 73.43 at the end of July.
`Difficult' Conditions
The Australian currency fell today after separate reports showed sales of newly built homes declined last month to the lowest since November 2006 and lending to Australian consumers and businesses rose at the slowest annual pace in six years in July, reinforcing the central bank's view that the economy is cooling enough to cut borrowing costs.
Australian Prime Minister Kevin Rudd said today the economy faces ``difficult'' conditions and will pick up in 2009.
Australia's dollar has tumbled 12 percent since reaching a 25-year high of 98.49 cents on July 16. Policy makers said they may cut rates soon to avoid a ``deeper and more persistent'' economic slowdown, according to minutes of this month's rate meeting released Aug. 19. The currency has also weakened as the prices of commodities the country exports slumped on concern global growth is slowing.
Australia's benchmark borrowing cost is 7.25 percent, New Zealand's 8 percent while the U.S. Federal Reserve's target is 2 percent. Traders expect the Reserve Bank of Australia to cut rates by a quarter-percentage point on Sept. 2 and lower the benchmark to at least 6.25 percent in the next year, according to Credit Suisse Group indexes based on interest-rate swaps.
The Reserve Bank of New Zealand, which cut the rate by a quarter-percentage point on July 24, will lower borrowing costs to at least 6.75 percent within a year, a similar index shows.
New Zealand Dollar
New Zealand's dollar had its longest monthly losing streak in three years after a U.S. government report showed a 3.3 percent annualized increase in gross domestic product from April through June that was higher than previously estimated. New Zealand's $104 billion economy probably contracted in the first two quarters, the Treasury Department said this month.
Investors also bought U.S. assets after Nationwide Building Society said house prices in Britain fell this month at the fastest annual pace in almost 20 years, and Bank of England policy maker David Blanchflower said U.K. interest rates need to decline to help the economy out of a recession.
``A rebound in the U.S. dollar amid a mix of strong GDP and dovish comments from the Bank of England, knocked the New Zealand dollar back,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. ``We can't help but think the U.S. dollar will come off looking the best of a bad bunch.''
Australian 10-year government bonds advanced this week, pushing the yield down 3 basis points to 5.76 percent. The price of the 5.25 percent bond maturing in March 2019 gained 0.256, or A$2.56 per A$1,000 face amount, to 96.017. The yield was 6.22 percent at the end of last month.
New Zealand's benchmark 10-year bond yield fell 2 basis points to 5.99 percent. It has fallen 14 basis points this month. A basis point is 0.01 percentage point.
To contact the reporters on this story: Chris Young in Sydney at cyoung12@bloomberg.net; Aaron Pan in Hong Kong at Apan8@bloomberg.net.
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