Australian, New Zealand Dollars Fall on Credit-Market Concerns

By Ron Harui and Tracy Withers

Aug. 26 (Bloomberg) -- The Australian and New Zealand dollars declined for a second day against the yen as concerns credit-market turmoil will widen prompted investors to sell higher-yielding assets funded in the Japanese currency.

Australia's dollar slid toward a four-month low and New Zealand's dollar fell to its lowest in more than a week versus the yen on speculation American International Group Inc. will post a loss, spurring investors to reduce so-called carry trades. The Australian dollar dropped to its lowest in seven months against the U.S. currency on prospects the nation's central bank will cut interest rates from a 12-year high 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 fell 1.4 percent, the most since Aug. 13, to 94.01 yen as of 11:30 a.m. in Sydney, from 95.34 yen late in Asia yesterday. The currency, known as the Aussie, reached 93.57 yen, near the 93.15 yen low on Aug. 13, the weakest level since April 15.

The Aussie dropped 1 percent to 85.97 U.S. cents from 86.85 cents. It reached 85.64 cents, the weakest since Jan. 23. It will slide toward 83 cents in the next few weeks, Milton said.

The New Zealand dollar lost 1.8 percent, the largest decline since Aug. 8, to 76.40 yen from 77.80 yen late in Asia yesterday. It touched 76.06 yen, the lowest since Aug. 14. The currency, known as the kiwi, slid to 69.86 U.S. cents from 70.85 cents. It reached 69.62 cents, the weakest since Aug. 15.

Carry Trades

The Australian and New Zealand dollars are favorite targets 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.

Benchmark interest rates are 7.25 percent in Australia and 8 percent in New Zealand, compared 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.

The New Zealand and Australian dollars were the worst and second-worst performers among the 16 most-traded currencies versus the yen today after AIG tumbled to a 13-year low as Credit Suisse Group said the world's largest insurer may lose $2.41 billion this quarter on mortgage-related writedowns.

`Unresolved Credit Issues'

Mortgage-finance companies Fannie Mae and Freddie Mac have fallen more than 90 percent in the past year amid concerns the U.S. may need to rescue them in a bailout that would wipe out shareholders.

``Unresolved credit issues at AIG and the troubled U.S. mortgage agencies took center stage last night,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. ``The sharp slide in equities and worries about the global outlook triggered risk aversion.''

Losses and writedowns on securities related to subprime loans now exceed $500 billion at financial institutions worldwide, according to data compiled by Bloomberg.

New Zealand's dollar has slumped 11.2 percent the past three months, the worst performer among the 16 major currencies, amid expectations the central bank will cut interest rates, reducing its attraction to investors seeking higher yields.

The Reserve Bank of New Zealand cut the official cash rate on July 24, the first reduction in five years, and said further reductions are likely as the economy slows. Traders are betting the RBNZ will lower borrowing costs by 1.46 percentage points over the next 12 months, according to a Credit Suisse Group index based on swaps trading.

`Underweight' From `Neutral'

Investors should sell the New Zealand dollar as the drop in global commodity prices slows the nation's economic growth, according to Standard Chartered Plc.

The New Zealand dollar is likely to fall to 69 cents by year-end, compared with a previous estimate of 71 cents, according to Standard Chartered. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials has fallen almost 15 percent from a peak in July.

``The recent correction in global commodities is the straw that has broken the camel's back,'' New York-based currency strategist Mike Moran and Singapore-based Callum Henderson wrote in a research note yesterday. Fund managers should reduce their New Zealand dollar-denominated holdings to ``underweight'' from ``neutral,'' they wrote.

Australian government bonds gained. The yield on the 10- year bond fell 7 basis points, or 0.07 percentage point, to 5.73 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.527, or A$5.27 per A$1,000 face amount, to 96.260.

New Zealand government debt was little changed, with the yield on the benchmark 10-year note holding at 6.09 percent. Yields move inversely to prices.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Tracy Withers in Wellington at twithers@bloomberg.net