Australia Dollar to Fall as Rates May Halve to 3%, TD Says

By Candice Zachariahs

Oct. 14 (Bloomberg) -- Australia's dollar may drop 8.5 percent to 64 U.S. cents in the first half of 2009 as the country's central bank slashes interest rates to counter a global recession, TD Securities said.

The Reserve Bank of Australia probably will slash borrowing costs 2 percentage points from 6 percent to lower the burden on households as unemployment rises and inflation eases , London- based Stephen Koukoulas, global strategist at TD Securities, wrote yesterday in a research note. The RBA cut its benchmark 1 percentage point on Oct. 7, the most since a recession in 1992.

Australia's ``terms of trade are collapsing, the global economy is in recession and the banking system still does not operate efficiently,'' Koukoulas wrote. ``The risks to this forecast favor a cash rate even lower, perhaps towards 3 percent.''

The country's 17-year economic boom is slowing as prices plunge for commodities that account for 60 percent of Australia's exports. Lower revenue from raw materials and a drop in interest rates may push the Australian currency to 64 U.S. cents by June next year, from an expected 70 cents at the end of 2008, TD Securities said.

``The risks to the Australian dollar are toward 55 cents,'' Koukoulas wrote.

The currency jumped 3.8 percent to 69.78 U.S. cents as of 9:08 a.m. in Sydney, from 67.24 cents late in Asian trading yesterday. The Australian dollar plunged 28 percent the past three months, the worst performance among the 16 most-traded currencies against the greenback.

Traders expect the RBA to lower its cash rate by 1 percentage point over the next year, according to a Credit Suisse index based on overnight swaps. JPMorgan Chase & Co said yesterday it expects the RBA to bring rates down to 4.5 percent by 2009.

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