Aussie Dollar May Gain 10% by Year-End, BlackRock's Miller Says

By Candice Zachariahs

Oct. 27 (Bloomberg) -- The Australian dollar may register an ``explosive bounce'' of about 10 percent this year against the U.S. dollar as the government seeks to bolster financial markets, BlackRock Inc. said.

The currency traded near a five-year low against the greenback as slumping credit and equity markets prompted U.S. funds to slash overseas investments. The Reserve Bank of Australia intervened for a second day today to buy the currency, which plunged Oct. 24 to 60.57 U.S. cents, the lowest since April 2003. It touched a 25-year high of 98.49 cents on July 16.

``The Aussie dollar could have a somewhat explosive bounce'' if markets calm down, said Stephen Miller, who oversees $2.5 billion of Australian dollar debt at BlackRock Inc. in Sydney, in a interview Oct. 24. ``It's borne in the short term a disproportionate brunt of the rush for the U.S. dollar.''

The Australian currency declined 0.3 percent to 62.08 U.S. cents as of 2:44 p.m. in Sydney from 62.23 cents in New York on Oct. 24. It bought 58.27 yen after touching 55.14 yen, its lowest since trading freely in 1983, late last week in New York.

Governments around the world committed trillions of dollars to buy stakes in financial institutions and resuscitate lending after Lehman Brothers Holdings Inc.'s collapse in September caused markets to seize up.

``You could get a 10 percent move between now and the end of the year quite easily. Other things equal that equates to a 5 to 8 cent upward move against the U.S. dollar,'' said Miller.

Australia's dollar has fallen 29 percent since the beginning of the year as the UBS Bloomberg Constant Maturity Commodity index of 26 raw materials dropped 26 percent. Raw materials, including gold and crude oil, account for 60 percent of Australia's exports.

RBA Lowering Rates, Forecasts

The Reserve Bank of Australia lowered its benchmark rat to 6 percent this month, down from a 12-year high of 7.25 percent as recently as August, to encourage spending and boost the domestic economy. Traders are betting that the RBA will reduce borrowing costs 164 basis points over the next 12 months, according to a Credit Suisse index based on overnight swaps trading. A basis point is 0.01 percentage point.

The Australian dollar has been a favorite among investors seeking higher yields with the benchmark interest rate at 0.5 percent in Japan and 1.5 percent in the U.S.

Falling commodity prices and interest rates will ``potentially be a dangerous cocktail,'' for the Australian dollar in the longer term, said Miller. He expects the cash rate ``may well have a 3 in front of it by the end of next year.''

St. George Bank Ltd. today lowered its forecast for the Australian dollar citing deteriorating global growth. The bank expects the Aussie to trade at 61 U.S. cents by the end of the year, drop to 59 cents in the first quarter of 2009, and then strengthen from there to 71 cents by end 2009.

``With volatility high and liquidity still relatively thin, it should be noted that the nearer-term forecasts remain characterized by higher uncertainty than usual,'' wrote Sydney- based Besa Deda, acting chief economist and strategist at St. George Bank Ltd.

The Commonwealth Bank of Australia reduced its forecast for the Aussie on Oct. 17, saying it would reach a low of 59 U.S. by March 31. Australia & New Zealand Banking Group Ltd. cut its estimate for the currency to 60 U.S. cents on Oct. 21.

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