N.Z. Dollar Declines as Credit-Market Losses May Temper Growth

By Ron Harui

Aug. 19 (Bloomberg) -- The New Zealand dollar fell on speculation global credit-market losses will temper growth in the South Pacific economy, backing the case for the Reserve Bank of New Zealand to cut interest rates.

New Zealand's dollar snapped three days of gains against the yen on concern the U.S. government will be forced to bail out Fannie Mae and Freddie Mac, spurring investors to reduce so- called carry trades. The currency dropped from its highest in more than a week high versus the U.S. dollar as traders held bets the RBNZ will lower borrowing costs in coming months.

``We have a reminder that the credit stresses are far from over in the U.S.,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``A lot of the carry crosses might be under pressure as a consequence of that.''

The New Zealand dollar declined 0.6 percent to 78.04 yen as of 12:05 p.m. in Wellington, from 78.53 yen late in Asia yesterday. It reached 73.99 yen on Aug. 13, the lowest since Aug. 25, 2006. The currency, known as the kiwi, weakened to 70.94 U.S. cents from 71.23 cents. It earlier reached 71.60 cents, the highest since Aug. 8.

The kiwi extended this month's loss to 1.8 percent versus the yen after Barron's said it's likely the U.S. government will need to inject equity capital into Fannie Mae and Freddie Mac. The benchmark interest rate of 8 percent in New Zealand compares with 0.5 percent in Japan and 2 percent in the U.S., making the currency a favorite target for carry trades.

RBNZ Rate Bets

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits.

RBNZ Governor Alan Bollard cut the benchmark rate in July for the first time in five years and said further reductions are likely as the economy slows. Traders expect the RBNZ will lower borrowing costs by about 1.5 percentage points within the next year, according to a Credit Suisse Group index based on interest-rate swaps.

New Zealand's government debt was little changed, with the benchmark 10-year yield at 6.18 percent and the three-year yield at 6.25 percent. Yields move inversely to prices.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net