Australian Dollar Falls to 6 1/2-Month Low as Yield Gap Shrinks

By Candice Zachariahs

Aug. 12 (Bloomberg) -- The Australian dollar dropped to the weakest level in 6 1/2 months as the yield advantage of the nation's two-year government bonds over similar-dated U.S. Treasuries shrank to the lowest in more than eight months.

The currency, known as the Aussie, declined for the 11th day, the longest losing streak since at least 1975, after the Reserve Bank of Australia said yesterday that a ``significant moderation'' in domestic demand would give it room to reduce borrowing costs. The local dollar also fell as the prices of commodities that the nation exports such as gold and copper slid.

``This reflects a very big change in expectations in domestic money markets from the RBA,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. With yield differentials narrowing ``and commodity prices moving lower that removes a relative support for the Aussie.''

The Australian dollar declined to 88.16 U.S. cents at 9:04 a.m. in Sydney, from 89.02 cents in late Asian trading yesterday. It earlier touched 87.94 cents, the weakest since Jan. 29. It reached a 25-year high of 98.49 cents on July 16. The Aussie fell to 97.04 yen, from 97.72 yen yesterday.

The currency declined as the difference in yield between two-year Australian and similar-maturity U.S. government debt narrowed to 3.38 percentage points, the lowest since Nov. 28. The differential reached a high of 5.1 points on Feb. 29.

`Fairly Slow'

The RBA said yesterday that ``economic growth will be fairly slow in the period ahead,'' in its quarterly policy statement. Gross domestic product will probably expand 2 percent this year compared with 4.3 percent in 2007 and less than the 2.25 percent forecast by the bank in May, the RBA said.

Traders are certain the Reserve Bank will lower its 7.25 percent benchmark rate by at least a quarter-percentage point when it meets next on Sept. 2, according to a Credit Suisse Group index based on overnight swaps trading yesterday. They expect the bank to reduce rates by 89 basis points, or 0.89 percentage point, over the next 12 months, another index shows.

Australian 10-year government bonds fell for the first time in four days, pushing the yield up 2 basis points to 5.93 percent. The price of the 5.25 percent bond maturing in March 2019 declined 0.115, or A$1.15 per A$1,000 face amount, to 94.705. Bond yields move inversely to prices.

The Australian dollar also dropped as gold, the nation's third most-valuable raw material export, tumbled to its lowest price since December. Oil, it fourth most-valuable, fell to a 14-week low and copper slipped to its lowest in six months. Commodity exports contribute 17 percent to the nation's economy.

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