Australian Dollar Falls on Heightened Credit-Market Concerns

By Chris Young

Aug. 26 (Bloomberg) -- The Australian dollar fell for a second day against the yen as concerns credit-market turmoil will widen spurred investors to sell higher-yielding assets funded in the Japanese currency.

Australia's currency also slid toward a six-month low against the U.S. dollar as the Standard & Poor's 500 index dropped on a Kansas bank's failure and speculation American International Group Inc. will post a loss, reduced the appeal of so-called carry trades. Australia's dollar was the second-worst performer among the 16 most-traded currencies on speculation the central bank will lower interest rates next week.

``I'm concerned the Australian dollar can't bounce from here and we have more downside to come,'' said Paul Milton, chief foreign-exchange dealer at Societe Generale SA in Sydney. ``The fundamental picture is looking shaky for the Australian dollar and we're staring at rate cuts.''

The Australian dollar slid to 86.40 U.S. cents as of 8:41 a.m. in Sydney, compared with 86.85 in late Asian trading yesterday. It reached 86.26 cents, near the six-month low of 85.93 cents touched on Aug. 13. It will slide toward 83 cents in the next few weeks, Milton said.

The currency dropped 1 percent to 94.41 yen.

Carry Trades

The Australian dollar is a favorite target of carry trades, in which investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency market moves erase those profits. Australia's 7.25 percent benchmark interest rate compares with 0.5 percent in Japan and 2 percent in the U.S.

Traders are certain Reserve Bank of Australia policy makers will lower their interest rate by a quarter-percentage point when they meet Sept. 2, according to interest-rate futures trading on the Sydney Futures Exchange.

AIG tumbled to a 13-year low after Credit Suisse Group said the insurer may lose $2.41 billion this quarter on mortgage- related writedowns. Columbian Bank & Trust Co. became the ninth U.S. bank to collapse this year.

Australian government bonds gained. The yield on the 10- year bond fell 6 basis points, or 0.06 percentage point, to 5.74 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.466, or A$4.66 per A$1,000 face amount, to 96.199. Bond yields move inversely to prices.

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