Australian Dollar Declines as Returns on Fixed-Income Diminish

By Chris Young

Aug. 28 (Bloomberg) -- The Australian dollar fell toward its lowest level this year against the U.S. currency on concern investors will seek higher-yielding assets elsewhere on prospects the central bank will lower interest rates next week.

The currency declined for a second day against the New Zealand dollar as traders bet the Reserve Bank of Australia will cut its 7.25 benchmark borrowing cost on Sept. 2, the first reduction in seven years. Australian 10-year government bond yields dropped to a 17-month low, 32 basis points less than similar-maturity New Zealand debt compared with 7 basis points more than a month ago. New Zealand's interest rate is 8 percent.

The Australian dollar declined to 85.83 U.S. cents as of 8:50 a.m. in Sydney from 86.18 in late Asian trading yesterday. It touched 84.94 cents on Aug. 26, the lowest since September. The currency fell 0.5 percent to NZ$1.2224, taking its loss the past month to 5.1 percent versus New Zealand's dollar.

``The RBA looms as a key event risk for the Australian dollar and traders are cautious before this,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. ``The Aussie will struggle to get over resistance at 86 cents,'' she said, referring to the currency by its nickname.

The Aussie has dropped against all 16 of the most-traded currencies in August and is down 8.9 percent against the U.S. dollar, heading for its biggest monthly loss since July 1986.

13 Percent Drop

The currency has plunged almost 13 percent since reaching a 25-year high of 98.49 cents on July 16 as reports have shown Australian business confidence held in July to the lowest level since 2001, home-loan approvals fell to a four-year low in June, and employers hired fewer workers. Australia's central bank said on Aug. 19 it may soon cut rates to avoid a ``deeper and more persistent'' economic slowdown.

Traders expect the Reserve Bank will cut rates by a quarter-percentage point next week 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.

Australian government debt gained for a third day. The yield on the 10-year bond fell 1 basis point, or 0.01 percentage point, to 5.70 percent, the lowest since mid-March 2007. The price of the 5.25 percent security maturing in March 2019 rose 0.107, or A$1.07 per A$1,000 face amount, to 96.446. Yields move inversely to prices.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net.