Australian Dollar Falls as Investors Pare Carry-Trade Holdings

By Chris Young

Sept. 1 (Bloomberg) -- The Australian dollar fell to its lowest level in four months against the yen as a slide in U.S. stocks prompted investors to pare holdings of higher-yielding investments funded in Japan.

Australia's currency, a favorite of so-called carry trades, declined for a second day after crude oil futures increased as Hurricane Gustav approached the Gulf of Mexico. The Australian dollar approached its lowest in almost a year against the U.S. currency on speculation Reserve Bank of Australia policy makers will cut interest rates when they meet tomorrow.

``The risk aversion story has weakened the Australian dollar,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``Carry trade sentiment has been hurting it.''

The Australian dollar dropped 0.5 percent to 92.94 yen, reaching 92.71, the weakest level since April 2. It traded at 85.73 U.S. cents as of 8:49 a.m. in Sydney compared with 85.78 cents in late New York on Aug. 29. The currency will trade between 85.25 and 87.50 cents this week, Kyriakopoulos said.

The Australian currency is a favorite for carry trades because the nation's benchmark interest rate is at a 12-year high of 7.25 percent. That compares with 0.5 percent in Japan and 2 percent in the U.S. In the strategy, 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.

Traders are certain Reserve Bank of Australia policy makers will lower their interest rate by a quarter-percentage point when they meet tomorrow, according to interest-rate futures trading on the Sydney Futures Exchange.

Australian government bonds gained for a second day. The yield on the 10-year bond fell 1 basis point, or 0.01 percentage point, to 5.75 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.110, or A$1.10 per A$1,000 face amount, to 096.127. Bond yields move inversely to prices.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net.