New Zealand Dollar Drops as Rates Cut; Australia Currency Falls

By Candice Zachariahs and Tracy Withers

Sept. 11 (Bloomberg) -- The New Zealand dollar slid to the weakest in two years after the central bank lowered borrowing costs more than expected and signaled further cuts to combat the first recession in a decade. Australia's dollar fell.

New Zealand's dollar has fallen 19 percent in the past six months, the worst among the 16 most-traded currencies against the greenback, as central bank Governor Alan Bollard cut rates 0.5 percentage point today, reducing the premium offered by the nation's assets. ``We've got room to move,'' Bollard said in an interview from Wellington today. ``We're in a loosening mode.''

``There's no doubt that both the Australian household sector and the New Zealand household sector have slowed,'' said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia's fourth-largest bank. ``In the short- term both currencies will see further downside pressure.''

The New Zealand currency fell 2.7 percent to 64.99 U.S. cents at 4:55 p.m. in Sydney. The currency touched 64.88 cents, the lowest since September 2006. It fell to 69.66 yen, the weakest since July 2006, before trading at 69.73 yen from 71.72 yen yesterday.

Australia's dollar slipped 1 percent to 79.59 U.S. cents from 80.44 cents late in Asia yesterday. It earlier touched 79.44, the lowest since August 2007. The currency fell 1.1 percent to 85.42 yen.

The Australian and New Zealand dollars 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 1.7 percent against the Australian currency to NZ$1.2246.

Recession

The New Zealand economy is in its first recession since 1998 as the jobless rate rises, retail sales drop and a drought cuts farm exports, Bollard, 57, said. The country's dollar, a favorite of the so-called carry trade, has dived 12.5 percent since July 24, when Bollard cut the benchmark for the first time in five years.

Today's interest rate cut reduces the premium that New Zealand enjoys over Japan and the U.S., where borrowing costs are 0.5 percent and 2 percent, respectively. The New Zealand and Australian currencies over the past two years as Bollard raised interest rates to a record and Australia's benchmark rate reached a 12-year high. Reserve Bank of Australia Governor Glenn Stevens this month cut rates for the first time since 2001.

The U.S. Federal Reserve reduced borrowing costs seven times from 5.25 percent in September through April, the fastest pace of declines in two decades, to boost the economy. Japan's target rate has been steady at 0.5 percent since February 2007.

The kiwi, as the New Zealand dollar is called, also dropped as the difference in yield between three-year New Zealand and similar-maturity U.S. government debt narrowed to 2.70 percentage points, the lowest since October 2007.

Currency Concern

Bollard 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 expect the central bank to reduce rates a further 1.22 percentage point over the next 12 months according to a Credit Suisse Group index based on overnight swaps trading today.

``There are real reasons for the Reserve Bank of New Zealand to be quite worried about the economy,'' said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. ``It's clear conditions are far too tight.''

Ong was the only one of 15 economists surveyed by Bloomberg to predict the half-point cut. The rest forecast a quarter-point reduction.

Australian Jobs

The Australian dollar pared losses after a government report showed employers hired almost three times as many workers as economists forecast in August, adding to evidence the nation's mining boom is helping offset weaker domestic demand.

The number of people employed rose 14,600 last month, the statistics bureau said in Sydney today. The median estimate of 25 economists surveyed by Bloomberg News was for a 5,000 gain. The jobless rate fell to 4.1 percent from 4.3 percent.

Traders see a 77 percent probability the Reserve Bank of Australia will reduce rates at its next meeting on Oct. 7, down from 91 percent before the jobs data was released, according to another Credit Suisse index. The Australian dollar has dropped 18 percent since reaching a 25-year high on July 16.

Australian government bonds fell. The yield on the 10-year note rose 3 basis point, or 0.03 percentage point, to 5.66 percent. The price of the 5.25 percent bond maturing in March 2019 fell 0.192, or A$1.92 per A$1,000 face amount to 96.786. Bond yields move inversely to prices.

New Zealand government debt rose. The yield on the 10-year benchmark bond fell 4 basis points to 5.83 percent. The price of the 6 percent security due in December 2017 increased 0.309, or NZ$3.09 per NZ$1,000 face amount, to 101.17.

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