Australia Dollar Is at Year-Low as Rates Cut; N.Z. Dollar Drops

By Ron Harui and Tracy Withers

Sept. 2 (Bloomberg) -- The Australian dollar fell to its lowest level in almost a year after the Reserve Bank of Australia cut interest rates for the first time since 2001. The New Zealand dollar also declined.

The currencies dropped for a third day as concern that a global economic slowdown will deepen spurred declines in Asian stocks, prompting investors to sell higher-yielding assets. New Zealand's dollar was the second-worst performer among the 16 most-traded currencies against the U.S. dollar as the New Zealand Institute of Economic Research Inc. said the economy will probably shrink in the second and third quarters.

``Investors are risk averse, given worries over a global downturn and the slump in equities,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. ``The RBA has cut rates. The Australian and New Zealand dollars would be under downward pressure in such an environment.''

The Australian dollar fell 1.4 percent to 84.10 U.S. cents at 4:58 p.m. in Sydney from 85.29 cents late in Asia yesterday. It reached 84.08 cents, the lowest since Sept. 19. The currency, known as the Aussie, dropped to 91.16 yen from 92.01 yen.

The New Zealand dollar declined to 68.66 U.S. cents from 69.69 cents late in Asia yesterday. It reached 68.63 cents, the lowest since Aug. 13. The currency, called the kiwi, slid to 74.29 yen from 75.17 yen.

Second-Worse Performer

Australia's dollar is the second-worst performer among the 16 major currencies in the past month. The RBA cut its benchmark interest rates by a quarter-percentage point to 7 percent today. The decision was expected by 22 of 23 economists surveyed by Bloomberg News.

A government report showed today that Australia's home- building approvals fell 2.3 percent in July after gaining 2.2 percent in June, adding to signs economic growth is faltering.

The Aussie declined to a five-month low against the yen as the MSCI Asia-Pacific Index of regional shares dropped 1.2 percent, spurring investors to trim so-called carry trades.

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.

Benchmark interest rates are 7 percent in Australia and 8 percent in New Zealand, compared with 2 percent in the U.S. and 0.5 percent in Japan, making the currencies a favorite target of the carry trade.

`Condensed Version'

Losses in Australia's currency may be limited as RBA Governor Glenn Stevens said inflation ``is likely to remain relatively high in the short term'' even as the central bank lowered borrowing costs.

``It's a condensed version of everything we've heard from them over the past month,'' said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney.

Traders are betting the RBA will reduce rates by 1.09 percentage points over the next 12 months, compared with 1.08 percentage points yesterday, according to a Credit Suisse Group index based on interest-rate swaps.

The New Zealand dollar fell as declining oil prices buoyed the U.S. currency and investors reduced holdings of higher- yielding assets.

`Higher Risk Aversion'

``Higher risk aversion levels and a market comfortable buying the U.S. dollar ensured the New Zealand dollar suffered,'' said Khoon Goh, a senior economist at ANZ National Bank Ltd. in Wellington. ``The U.S. dollar is back in favor, if only by default.''

Crude oil for October delivery was at $110.92 a barrel, down 3.9 percent from the Aug. 29 close on the New York Mercantile Exchange.

Australian government bonds climbed for a third day. The yield on the 10-year bond fell 4 basis points, or 0.04 percentage point, to 5.69 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.324, or A$3.24 per A$1,000 face amount, to 96.557. Bond yields move inversely to prices.

New Zealand government bonds were little changed. The yield on the benchmark 10-year note held at 5.99 percent and the yield on the three-year security was at 6.05 percent, according to data compiled by Bloomberg.

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