Australian Central Bank Intervened as Currency Extended Decline

By Garfield Reynolds

Oct. 27 (Bloomberg) -- Australia's central bank bought the country's currency for a second day to arrest a 35 percent drop in the past three months as prices slumped for commodities that generate 70 percent of the nation's export earnings.

Australia's dollar pared declines after the Reserve Bank of Australia 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 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 RBA 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.

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 in the statement. ``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 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 that use borrowings in the Japanese currency to buy assets abroad paying higher interest rates.

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.

`Coordinated Intervention'

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.

Australia's dollar plunged 31 percent against the yen and 22 percent versus the greenback this month as investors bought back currency borrowed in carry trades.

The Australian dollar pared declines after the RBA acted today, trading down 0.2 percent at 62.11 U.S. cents at 2:42 p.m. in Sydney, from 62.23 cents on Oct. 24 late in New York. It earlier fell as low as 61.26 cents, close to the five-year low of 60.57 touched on Oct. 24. The Australian currency dropped as much as 3.9 percent to 56.38 yen and traded at 58.36 yen, down 0.5 percent from the end of last week.

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.

Korea Cuts Rate

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 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: Garfield Reynolds in Sydney at greynolds1@bloomberg.net