Australian Dollar Falls to 6 1/2-Month Low; N.Z. Dollar Drops

By Ron Harui and Candice Zachariahs
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Aug. 12 (Bloomberg) -- Australia's dollar fell to the lowest in more than six months as the yield premium on the nation's two- year government bonds over Treasuries shrank to the least in about eight months. New Zealand's dollar dropped.

The Australian dollar, also known as the Aussie, declined for an 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 lower borrowing costs. The Australian and New Zealand currencies also dropped as prices slid for commodities the two countries export such as gold, copper, lumber and lamb.

``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 as much as 1.6 percent to 87.58 U.S. cents, the lowest since Jan. 25, and traded at 87.74 at 11:37 a.m. in Sydney from 89.02 cents late in Asia yesterday. The currency fell 1.1 percent to 96.67 yen from 97.72 yen.

The New Zealand dollar dropped 1 percent to 69.70 U.S. cents from 70.39 cents late in Asia yesterday. It reached 69.50 cents, the lowest since Sept. 11. The currency weakened 0.7 percent to 76.76 yen from 77.27 yen.

The Aussie was the second-worst performer among the 16 most- traded currencies versus the U.S. dollar in Asian trading today as the difference in yield between two-year Australian and U.S. government bonds narrowed to 3.37 percentage points, the lowest since Nov. 16. The differential reached a high of 5.10 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 also said.

Traders are certain the RBA 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 interest-rate swaps. They expect the central bank to reduce rates by 91 basis points, or 0.91 percentage point, over the next 12 months, another Credit Suisse index shows.

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

Commodity prices influence the Australian and New Zealand dollars because raw materials account for 60 percent of Australia's exports, while sales of commodities including lumber make up 70 percent of New Zealand's overseas shipments.

`Most Vulnerable'

The New Zealand dollar, or kiwi, slid to an 11-month low as falling commodity prices may diminish the outlook for economic growth in the South Pacific nation, prompting traders to add to bets on further central bank rate reductions.

``Both the kiwi and the Aussie are probably most vulnerable, especially against the correlation that they exhibit against the commodity side,'' said Mike Moran, a senior currency strategist at Standard Chartered Bank in New York. ``Those are probably going to see the more pronounced retracement.''

The UBS Bloomberg Constant Maturity Commodity Index of 26 commodities declined 0.3 percent to 1,416.804 yesterday, the lowest since March 20. New Zealand's Treasury Department said Aug. 4 the economy probably contracted in the second quarter, pushing the country into its first recession in a decade.

The Aussie and kiwi had correlations of 0.81 and 0.87, respectively, with the UBS Bloomberg Constant Maturity Commodity Index in the past month, according to data compiled by Bloomberg. A reading of 1 would mean they move in lockstep.

RBNZ Rate Bets

The Reserve Bank of New Zealand lowered its official cash rate by a quarter-percentage point to 8 percent on July 24. New Zealand's benchmark interest rate compares with 2 percent in the U.S. and 0.5 percent in Japan, making the kiwi a favorite target for investors seeking higher returns.

Traders are betting that the RBNZ will lower its benchmark rate by 1.46 percentage points over the next 12 months, up from 1.34 percentage points two weeks ago, according to a Credit Suisse Group index.

Australian 10-year government bonds advanced for a fourth day, pushing the yield down 3 basis points, or 0.03 percentage point, to 5.89 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.217, or A$2.17 per A$1,000 face amount, to 95.037.

New Zealand's government debt was little changed. The yield on the benchmark 10-year note was at 6.16 percent, and the yield on the three-year security climbed to 6.23 percent from 6.22 percent. Yields move inversely to prices.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net