Australian Dollar Trades Near 3-Month Low as Yield Gap Shrinks

By Chris Young

Aug. 4 (Bloomberg) -- The Australian dollar traded near its lowest in three months as the yield advantage of the nation's two-year government bonds over similar-dated U.S. Treasury notes shrank to the lowest level this year.

The currency, known as the Aussie, has slid 5.6 percent since reaching a 25-year high on July 16, as signs the economy is slowing prompted traders to bet the central bank will cut interest rates by a half percentage point in the next 12 months. Australia's dollar fell before a government report that economists estimate will show house prices dropped last quarter for the first time in almost three years.

``Talk of rate cuts will cost the Aussie dearly,'' Peter Pontikis, a treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia, wrote in a note to clients. ``The pressure is on the Australian dollar to fall to earth and back to more reasonable support at just below 90 U.S. cents.''

The Australian dollar traded at 93.01 U.S. cents as of 8:48 a.m. in Sydney, compared with 92.93 cents late last week in New York. It reached 92.86 cents, matching the three-month low touched Aug. 1. Trading volumes may be reduced because of a bank holiday in New South Wales, Australia's most populous state.

House prices dropped 1.3 percent last quarter compared with a 1.1 percent increase in the first three months of the year, according to the median estimate of economists surveyed by Bloomberg News. The Australian Bureau of Statistics will release the report at 11:30 a.m. in Sydney.

Rate Outlook

The Reserve Bank of Australia raised its overnight cash- rate target twice this year to a 12-year high of 7.25 percent to slow inflation. Reports last week showed retail sales fell by the most in six years in June and lending to consumers and businesses rose at the slowest annual pace since 2002.

Investors expect the central bank will cut borrowing costs by 68 basis points in the next year, according to a Credit Suisse Group index based on trading in interest-rate swaps. Investors were betting on higher rates as recently as July 14.

The difference in yield between Australian and U.S. government bonds with a two-year maturity narrowed to 3.67 percentage points, from 3.84 points a week ago, the least since Dec. 26.

Australian government bonds gained for fourth day, pushing the yield on the 10-year bond down 2 basis points to 6.10 percent, the lowest since April 15. The price of the 5.25 percent bond maturing in March 2019 rose 0.15, or A$1.50 per A$1,000 face amount, to 93.411. Bond yields move inversely to prices and a basis point is 0.01 percentage point.

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