New Zealand Dollar Declines as Investors Avoid Higher Yields

By Tracy Withers

Aug. 26 (Bloomberg) -- The New Zealand dollar fell a second day amid expectations credit market losses will widen, prompting investors to sell higher-yielding assets.

American International Group Inc. tumbled to a 13-year low after Credit Suisse said the world's largest insurer may post a loss, while Columbian Bank & Trust Co. became the ninth U.S. bank to collapse this year. New Zealand's currency has been buoyed by investors attracted by the nation's 8 percent benchmark rate, which is 7.5 points higher than Japan's and 6 points more than the Federal Reserve target.

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


New Zealand's currency fell to 70.39 U.S. cents at 8:50 a.m. in Wellington from 70.85 cents in late Asian trading yesterday. The currency fell to 76.91 yen from 77.80 yen.

The Standard & Poor's 500 Index decreased 2 percent after a Credit Suisse analysts said AIG may lose $2.41 billion this quarter on mortgage-related writedowns. Topeka, Kansas-based Columbian Bank was shuttered by the state bank commissioner's office and the Federal Deposit Insurance Corp. on Aug. 22. The FDIC's ``problem'' bank list grew by 18 percent in the first quarter to 90 institutions with combined assets of $26.3 billion.

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 10.5 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 high yields.

Central bank Governor Alan Bollard lowered the official cash rate on July 24, the first reduction in five years, and said further cuts are likely as the economy slows. The rate will drop to 6.5 percent within a year, according to a Credit Suisse index based on swaps trading.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net