Australia, N.Z. Dollars Slide as Carry Trades Fall Out of Favor

By Candice Zachariahs

Sept. 16 (Bloomberg) -- The New Zealand dollar dropped to the weakest in more than four years against the yen and Australia's slid to a 2 1/2-year low as a global stocks rout curbed demand for the nations' higher-yielding assets.

The currencies, favorites of so-called carry trades, also fell against the U.S. dollar after the Standard & Poor's 500 Index had its steepest decline since the September 2001 terrorist attacks on concerns more financial institutions will fail after Lehman Brothers Holdings Inc. filed for bankruptcy.

``Everything's been driven by the equity markets,'' said David Forrester, a currency economist at Barclays Capital Inc. in Singapore. The currencies ``expected to do the worst are Kiwi and Aussie. These are considered risky assets,'' he said referring to the currencies by their nicknames.

New Zealand's currency slid 1.9 percent to 67.90 yen at 4:42 p.m. in Sydney, from 69.21 yen late in Asia yesterday. It touched 67.70, the weakest since June 2004. It bought 65.14 U.S. cents from 65.71.

The Australian dollar fell 3 percent to 82.35 yen. The currency earlier reached 82.15 yen, the weakest since March 2006. It fell 2 percent to 79.02 U.S. cents and touched 78.76 cents, the lowest since August 2007.

The currencies fell as Lehman filed for the biggest bankruptcy in history yesterday and American International Group Inc.'s credit ratings were downgraded, threatening efforts to raise emergency funds and keep the company afloat.

Asian stocks plunged the most in eight months today and Mitsubishi UFJ Financial Group Inc. and Aozora Bank Ltd., two of Lehman's biggest creditors, led the steepest decline by Japanese banks since 1987.

Worst Performers

The Australian and New Zealand dollars are the worst performers this quarter among the 16 most-traded currencies against the yen, sliding 19 percent and 16 percent respectively. They've also posted drops of 10 percent and 6.8 percent versus the Swiss franc.

``As this crisis rolls on, the Aussie and Kiwi will lose more ground to safer currencies,'' said Tony Morriss, a senior currency strategist with ANZ Banking Group Ltd. in Sydney.

The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose to 31.70 yesterday, the highest since March 17.

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

Bonds Gained

Benchmark interest rates are 7 percent in Australia and 7.5 percent in New Zealand, compared with 2 percent in the U.S. and 0.5 percent in Japan, making them favorites with investors seeking higher returns.

Australian government bonds gained. The yield on the 10- year note fell 12 basis points, or 0.12 percentage points, to 5.448 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.965, or A$9.65 per A$1,000 face amount, to 98.433. Bond yields move inversely to prices.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, fell to 6.8 percent, its lowest since April 2006, from 6.84 on Sept. 12.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net