Australian Dollar Falls to Five-Year Low Against Greenback, Yen

By Jacob Greber and Candice Zachariahs

Oct. 8 (Bloomberg) -- The Australian dollar slumped to its lowest level in more than five years against the greenback and the yen as investors sold higher-yielding assets on concern frozen credit markets will stall the global economy.

The local dollar tumbled for the 11th day against the U.S. currency, losing more than 18 percent over the period, on concern investors will reduce bets on Australian and New Zealand assets funded by loans in countries where borrowing costs are lower. Increased volatility and a rout in stock markets is damping the appeal of the so-called carry trades.

Markets are ``are pricing for the apocalypse,'' said Peter Pontikis, an economist at Suncorp-Metway Ltd. in Brisbane. ``The fear factor is really out there. This isn't rational. We're in the zone between the authorization of the U.S. bailout package and when the actual liquification of the U.S. banking system comes into effect.''

The Australian dollar fell as low as 67.49 U.S. cents, the weakest level since September 2003, before trading at 68.18 cents as of 5:55 p.m. in Sydney, from 71.50 cents in late Asian trading yesterday. The so-called Aussie slid 5.8 percent to 68.62 yen, after touching 67.32, the lowest since January 2003.

New Zealand's dollar dropped 2.3 percent to 61.48 U.S. cents from 62.92 cents late in Asia yesterday. It slid 4.2 percent to 61.42 yen.

Global Recession

The global economy is headed for a recession next year as the U.S. expansion almost grinds to a halt, the International Monetary Fund forecast before a Group-of-Seven meeting this week. Australian home-loan approvals dropped to a seven-year low in August, according to government figures reported today.

Shares tumbled across the Asia-Pacific region today, extending a global sell-off that's wiped out more than $5 trillion of market value in the past week. The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose to a record 53.68 yesterday.

``The Aussie is a barometer of global financial market sentiment so it takes a particularly hard hit,'' said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney. The Australian dollar has lost 16 percent since the beginning of October and more than 30 percent since hitting a 25-year high on July 16.

The Australian and New Zealand currencies are popular targets for the carry trade, where investors seek higher returns on investments funded in countries with lower borrowing costs. The risk is that exchange-rate fluctuations erase profits.

Benchmark interest rates are 6 percent in Australia and 7.5 percent in New Zealand. That compares with 0.5 percent in Japan and 2 percent for the U.S. benchmark

Bonds Gain

Australian 10-year bonds rose for a fifth day. The yield on the 5.25 percent security due March 2019 fell 13 basis points to 4.93 percent, according to data compiled by Bloomberg. The price gained 1.052, or A$10.52 per A$1,000 face amount, to 102.575. A basis point is 0.01 percentage point.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, dropped to 6.570 percent today from 6.740 yesterday.

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