Australian, N.Z. Dollars Slip as Commodities, U.S. Stocks Slide

By Candice Zachariahs
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Sept. 24 (Bloomberg) -- The Australian and New Zealand dollars dropped, extending declines from three-week highs reached yesterday, after prices declined for commodities the nations export, including oil and gold.

The currencies also slid the most in six days against Japan's yen as concern Congress will hold up a $700 billion plan to bail out the U.S. financial industry dulled the appeal of the South Pacific nations' higher-yielding assets. The UBS Bloomberg Constant Maturity Commodity index of 26 raw materials fell for the first time in three days. U.S. stocks tumbled, completing the biggest two-day drop in six years.

``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 1 percent to 83.53 U.S. cents at 10:32 a.m. in Sydney from late in Asia yesterday. It yesterday touched 85.19 cents, the highest since Sept. 2. Grace predicts the currency will rally back to between 85 and 87 U.S. cents over the next month before weakening to 78 cents by year-end. The Aussie bought 88.10 yen from 88.93 yen.

New Zealand's dollar slid 1.2 percent to 68.17 U.S. cents from yesterday, when it reached a high of 69.53. It dropped 1.1 percent to 71.91 yen.

The Australian dollar fell as the price of gold, the nation's third most-valuable raw material export, fell below $900 an ounce in New York yesterday. Crude oil, its fourth most- valuable export, also declined. 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.

Carry Trades

The currencies slid against Japan's 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 since Sept. 17. The Standard & Poor's 500 Index of shares in the U.S., home to the world's biggest stock market, dropped 5.3 percent in the last two days.

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., making the nations' assets favorites with investors using so-called carry trades to seek higher returns using funds from a country with low borrowing costs. The risk is that exchange-rate fluctuations erase profits.

Australian government bonds rose. The yield on the 10-year note fell 1 basis points, or 0.01 percentage point, to 5.760 percent. The price of the 5.25 percent security maturing in March 2019 fell 0.073, or A$0.73 per A$1,000 face amount, to 96.031. Bond yields move inversely to prices.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, rose to 7 percent, from 6.970 percent yesterday.

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