By Candice Zachariahs
Oct. 27 (Bloomberg) -- The Australian dollar slid against the yen and the U.S. currency on concern the global economy is slipping into a recession, prompting the central bank to stem declines. New Zealand's dollar also fell against the yen.
Australia's dollar and New Zealand's have plunged more than 20 percent against the yen in the past week as investors bought back Japanese currency borrowed in so-called carry trades to purchase high-yielding assets in the South Pacific nations. The Australian currency traded near record lows against the yen touched on Oct. 24.
``Investor confidence is shot to ribbons and it's the carry trades that are copping it fair and square in the face,'' said Paul Milton, chief foreign-exchange dealer at Societe Generale SA in Sydney. ``We're approaching levels where we should start finding some natural support in the Aussie. However, it's a brave man who buys Aussie in this environment,'' he said, referring to the currency by its nickname.
The Australian dollar fell 3.2 percent to 56.79 yen as of 1:03 p.m. in London from 58.68 yen in New York on Oct. 24, when it had touched 55.14 yen, the weakest since the Australian currency started trading freely. The currency slid 1.5 percent to 61.26 U.S. cents from 62.23 cents in New York last week, when it touched the lowest since April 2003.
New Zealand's dollar dropped 4.1 percent to 50.31 yen from 52.48 late last week in New York. The currency fell 2.7 percent to 54.17 U.S. cents from 55.67 cents.
RBA Intervention
Australia's dollar pared declines after the nation's central bank intervened as the currency neared its weakest level in five years against the U.S. dollar and a record low versus the yen. The Group of Seven industrialized nations are concerned about excessive moves in the yen, according to a joint statement read out by Japan's Finance Minister Shoichi Nakagawa today.
The central bank ``provided more liquidity to the foreign exchange market,'' a spokesman for the Sydney-based Reserve Bank of Australia said today by phone. He declined to be identified. The intervention came amid similar circumstances to those on Oct. 24 when the RBA bought Australian dollars, according to the spokesman.
The Australian dollar has tumbled 35.6 percent against the yen and 26.5 percent versus the greenback over the past month as investors have dumped equities amid widespread concern that the global economy will fall into recession. New Zealand's currency has fallen 31 percent and 21 percent against the yen and dollar, respectively.
Ready to Act
A coordinated currency intervention ``is possible, if other countries agree that the yen is too expensive, but it seems unlikely,'' said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd., one of the 24 primary dealers required to bid at government auctions.
Japan's Nakagawa said the nation was ready to take action on the yen if needed.
``We reaffirm our shared interest in a strong and stable international financial system,'' the G-7 said. ``We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability.''
The VIX volatility index, a gauge reflecting expectations for stock-market price changes and risk aversion, reached a record of 79.13 on Friday.
The yen and the U.S. dollar rallied this month as the credit crunch shattered confidence in riskier assets such as South Korean shares and so-called carry trades.
The yen advanced this month against all of some 170 currencies tracked by Bloomberg, prompting speculation central banks may take coordinated action to drive down the yen and the dollar, after central bank policymakers cut borrowing costs together three weeks ago.
Cutting Rates
In carry trades, investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. The risk is that currency moves erase the profits.
The RBA on Oct. 7 cut its benchmark interest rate by 1 percentage point, twice as much as economists had estimated, to 6 percent. That reduction, the central bank's biggest since a recession in 1992, was followed by a round of cuts two days later from central banks in Europe and the U.S.
Australia's benchmark interest rate is 6 percent, compared with 0.5 percent in Japan, 1.5 percent in the U.S. and the European Central Bank's 3.75 percent rate.
The Bank of Korea slashed interest rates today by a record 0.75 percentage point at an emergency meeting in an attempt to restore confidence after stocks lost a fifth of their value and the won fell to a decade low last week.
Governor Lee Seong Tae lowered the seven-day repurchase rate to 4.25 percent after returning from a two-day summit in Beijing that was the first meeting of Asian and European Union chiefs since calls for coordinated action mounted over the past month along with bank failures and plunging stock prices.
Sarkozy on Currencies
President George W. Bush will host a financial summit in Washington next month to address the fallout from the credit crunch. Future gatherings may also address foreign-exchange rates, according to French President Nicolas Sarkozy, who said talks about currencies may be put off until after Nov. 15.
``It is simply impossible to talk about the financial crisis without discussing currencies and the way in which they interact,'' Sarkozy said in Beijing yesterday.
South Korea last week pledged $130 billion to support lenders struggling to obtain foreign funds and said it will spend as much as 8 trillion won ($5.5 billion) to rescue builders struggling with unsold homes. The central bank said Oct. 24 it will inject 2 trillion won into the financial system through repurchase-agreement operations.
Central banks intervene in currency markets by arranging sales or purchases of foreign exchange.
To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
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