New Zealand Dollar Drops as Rates Cut; Australia Currency Falls

By Candice Zachariahs

Sept. 11 (Bloomberg) -- The New Zealand dollar slid to the weakest in almost two years after the central bank lowered borrowing costs more than expected and signaled more cuts, reducing yields on the country's assets. Australia's dollar fell.

The currencies declined against the U.S. dollar and the yen as central bank Governor Alan Bollard cut rates 0.5 percentage point to 7.5 percent, the most since 2001, sapping investor appetite for buying the nations' assets using funds borrowed in countries with lower interest rates. Traders increased bets Australia's central bank will trim borrowing costs next month.

``There's nothing in the statement to suggest there won't be more cuts,'' said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney. ``Our expectation is there will be another 50 basis point cut at the next meeting. The New Zealand dollar remains a sell on rallies.''

The currency fell 2.2 percent to 65.31 U.S. cents at 9:51 a.m. in Sydney from 66.79 cents in late Asian trading yesterday. The New Zealand dollar touched 65.16 cents, the lowest since October 2006. It fell to 70.19 yen from 71.72 yen.

Australia's dollar slipped 0.8 percent to 79.80 U.S. cents from 80.44 cents late in Asia yesterday. It earlier touched 79.44, the lowest since August 2007. The currency fell 0.8 percent to 85.61 yen.

The Australian and New Zealand dollar were the worst performers among the 16 most-traded currencies as the UBS Bloomberg Constant Maturity Index of 26 raw materials fell for the second day. 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.

The New Zealand dollar dropped 1.3 percent against the Australian currency to NZ$1.22.

Unexpected Cut

The Reserve Bank of New Zealand's decision to cut the official cash rate by 0.5 percentage point to avoid extending New Zealand's recession was predicted by one of 15 economists surveyed by Bloomberg. The other 14 expected Bollard to lower the rate a quarter point.

``The scale and timing of further reductions will depend on signs of declining inflation pressures and on exchange-rate adjustments,'' Bollard said in a statement in Wellington today. The Governor signaled during an interview with Bloomberg Television that he may slow the pace of interest rate cuts if the New Zealand dollar drops too fast.

That would ``import inflation,'' he said. ``It's not so much the level, but whether it was to move too fast in a downward direction.''

Traders see a 94 percent probability that the Reserve Bank of Australia will reduce rates at its next meeting on Oct. 7, up from 83 percent yesterday, according to a Credit Suisse index based on overnight swaps trading today. The Australian dollar has dropped 19 percent since reaching a 25-year high on July 16.

The New Zealand and Australian dollars are popular with investors who borrow cheaply in Japan, where the benchmark rate is 0.5 percent, and seek higher yields elsewhere. Australia's benchmark interest rate is 7 percent. Such trades are risky because profits are determined by movements in currencies, and traders exit the trades when risk aversion increases.

To contact the reporter on this story: Candice Zachariahs in Sydney at Czachariahs2@bloomberg.net