Australian, N.Z. Dollars Fall as Commodities Prices Decline

By Candice Zachariahs

Sept. 24 (Bloomberg) -- The Australian and New Zealand dollars fell the most in a week as prices of commodities the two nations export declined.

The currencies also weakened against the yen as U.S. stocks slumped, curbing investor appetite for buying the two nation's higher-yielding assets with funds borrowed in Japan. U.S. shares completed their biggest two-day drop in six years on concern Congress will hold up a $700 billion plan to bail out the financial industry.

``The Aussie was lower against a firmer U.S. dollar, softer commodity prices and weaker equity markets,'' said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney. ``The Aussie tends to underperform in that environment,'' he said, using the currency's nickname.

The Australian dollar fell 0.7 percent to 83.81 U.S. cents as of 5:02 p.m. in Sydney, from 84.40 cents late in Asia yesterday. It declined 0.1 percent to 89.01 yen. The currency will climb to between 85 and 87 U.S. cents in the next month before weakening to 78 cents by year-end, Grace said.

New Zealand's dollar slid 1 percent to 68.32 U.S. cents and dropped 0.2 percent to 72.57 yen.

The UBS Bloomberg Constant Maturity Commodity index of 26 raw materials fell for the first time in three days yesterday. The Standard & Poor's 500 Index dropped 5.3 percent during the past two days.

Australia's dollar declined as the price of gold, the nation's third most-valuable raw material export, dropped below $900 an ounce in New York yesterday. Crude oil, its fourth most- valuable export, also fell. Raw materials account for 60 percent of Australia's exports, and sales of commodities such as lumber make up 70 percent of New Zealand's overseas shipments.

Volatility Rises

The two currencies weakened against the yen after the VIX volatility index, a Chicago Board Options Exchange gauge used as a barometer of risk aversion, rose to 35.72, the highest level since Sept. 17.

Benchmark interest rates are 7 percent in Australia and 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 2 percent in the U.S., helping to attract investors to the South Pacific nations' assets.

Consumer confidence in New Zealand rose in the third quarter from a 17-year low in the previous three months, according to a survey released today by Westpac Banking Corp. and McDermott Miller Ltd. Reserve Bank of New Zealand Governor Alan Bollard reduced interest rates in July and September to 7.5 percent from 8.25 percent. New Zealand's currency lost 8.1 percent against the U.S. dollar since the July rate reduction.

`Quick and Aggressive'

The central bank will need to maintain its ``quick and aggressive approach,'' Joshua Williamson, a Sydney-based senior strategist at TD Securities, wrote in a research note today. New Zealand's policy makers will cut borrowing costs by 50 basis points to 7 percent next month, he said.

The Reserve Bank of Australia said today it had agreed with the U.S. Federal Reserve on a $10 billion swap line to boost U.S. dollar liquidity in Australia. ``The swap serves to alleviate a shortage of U.S. dollar liquidity which has affected market participants around the world including in the Asia-Pacific time zone,'' Australia's central bank said on its Web site.

Australian government bonds rose. The yield on the 10-year note fell 6 basis points, or 0.06 percentage point, to 5.71 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 gained 0.484, or A$4.84 per A$1,000 face amount, to 96.412.

New Zealand's 10-year bonds also gained with the yield falling 2 basis points to 5.81 percent. The nation's two-year swap rate, a fixed payment made to receive floating rates, rose to 6.99 percent, from 6.97 percent yesterday.

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