Australian Dollar Falls to 4-Month Low as Yield Gap Shrinks

By Candice Zachariahs

Aug. 6 (Bloomberg) -- The Australian dollar dropped to its lowest in four months as the yield advantage of the nation's two-year bonds over Treasuries shrank to the lowest this year on bets the central bank will cut interest rates next month.

The currency fell for a seventh day, its longest losing streak in almost two years, as the prices of commodities the nation exports such as gold and oil slid. Traders are betting the Reserve Bank of Australia will lower rates for the first time in almost seven years at its September meeting after policy makers said yesterday there's scope to reduce borrowing costs.

``The Australian dollar is in a massive, massive negative channel at the moment, it's got no friends,'' said Joshua Williamson, a senior strategist at TD Securities Ltd. in Sydney. ``We've seen commodity prices go against it, interest-rate differentials go against it, the U.S. dollar is strengthening and oil prices are coming down.''

The Australian dollar dropped to 91.33 U.S. cents, the lowest since April 4, before trading at 91.63 cents at 8:59 a.m. in Sydney from 91.85 cents late in Asia yesterday. The currency bought 99.21 yen from 99.07 yesterday when it slid 1.8 percent.

The currency slipped as the difference in yield between two-year Australian and similar-maturity U.S. benchmark government debt narrowed to 3.39 percentage points, the lowest since Nov. 28.

Rate-Cut Bets

Traders are betting that the central bank will lower rates by almost one percentage point in the next 12 months according to a Credit Suisse Group index based on swaps trading. Central banks usually adjust rates in 25 basis point, or quarter- percentage point, increments. A rate cut at the next RBA meeting on Sept. 2 is certain, according to another Credit Suisse index.

Reserve Bank Governor Glenn Stevens said yesterday that inflation may slow, allowing for a ``less restrictive stance'' on interest rates.

Banks including UBS AG, the world's second-largest currency trader, and Australia & New Zealand Banking Group Ltd. have lowered their forecasts for the currency, while RBC Capital Markets and Commonwealth Bank of Australia said they will adjust their target for the Aussie, as the currency is known.

The Australian dollar weakened against 12 of the 16 most- traded currencies as the prices of gold and crude oil, the nation's third and fourth most-valuable raw material exports, slid. Gold dropped below $900 an ounce and crude oil fell below $120 a barrel for the first time in three months. Commodity exports contribute 17 percent to the nation's economy.

Australian two-year government bonds rose for an 11th day, pushing the yield down 3 basis points to 5.97 percent, the lowest since March 2007, according to data compiled by Bloomberg. The price of the 5.25 percent security maturing in August 2010 rose 0.061, or A$0.61 per A$1,000 face amount, to 98.654.

To contact the reporter on this story: Candice Zachariahs in New York at czachariahs1@bloomberg.net