Australian Dollar Heads for Record Gain Versus Yen on Rescues

By Candice Zachariahs

Oct. 14 (Bloomberg) -- The Australian dollar headed for a record gain against the yen as governments worldwide pledged to stabilize financial systems. New Zealand's currency also rose.

The Australian currency advanced to its biggest two-day gain against the greenback after U.S. stocks rallied on a government plan to buy stakes in banks. Prime Minister Kevin Rudd announced A$10.4 billion ($7.4 billion) in spending to bolster Australia's economy, adding to an Oct. 12 pledge to shore up the nation's banks.

``Collectively all these measure help with risk appetite,'' said Besa Deda, acting chief economist and strategist at St. George Bank Ltd. in Sydney. ``The Aussie dollar will still be subject to volatility. If we see a number of up-days in equity markets going forward that might provide the currency with some support,'' she said, referring to the currency by its nickname.

The Australian dollar surged 7.7 percent, the most since it began trading freely in 1983, to 72.78 yen at 5:05 p.m. in Sydney from 67.57 yen late in Asia yesterday. The currency jumped 5.5 percent to 70.92 U.S. cents, from 67.24 cents yesterday. That extended its two-day advance to 7.4 percent.

New Zealand's currency advanced 4.5 percent to 63.67 yen. The kiwi dollar, as it's called, gained 2.6 percent to 62.21 U.S. cents from 60.65 cents late in Asia yesterday.

Bush Plan

The currencies rose as U.S. stocks staged the biggest rally in seven decades and the Bush administration prepared to announce plans to rescue frozen credit markets. The Standard & Poor's 500 Index rebounded from its worst week in 75 years with an 11.6 percent advance, its steepest since 1939, and the Dow Jones Industrial Average climbed more than 936 points.

The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, dropped from a record to 54.99 yesterday.

Stocks in Australia and New Zealand soared on reports the U.S. government will spend about $125 billion for stakes in nine major banks, according to people briefed on the matter. The institutions include Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc.

``The Australian dollar has moved from being priced in a global financial panic to being priced in a relief rally,'' wrote Richard Grace, chief currency strategist at Sydney-based Commonwealth Bank of Australia, in a research note today. ``The Australian dollar is likely to rally, possibly up to 75.20 cents. But then fundamental growth fears suggest declines.''

Australian banks' borrowing costs eased, according to a gauge that measures the availability of funds. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate narrowed to 82 basis points from 103 yesterday.

The Australian currency has lost 27 percent over the past three months, and New Zealand's is down 18.8 percent.

Rudd Guarantees

Prime Minister Rudd said today his government will boost the economy through programs for the elderly, families and first home buyers as global financial turmoil slows domestic growth.

The package is ``a sizeable injection into the domestic economy,'' wrote Sydney-based Joshua Williamson, a senior strategist at TD Securities Ltd. in a research note today. ``This initiative should place some further support under the Australian dollar.''

Rudd on Oct. 12 said his government will guarantee all deposits with financial institutions for the next three years to bolster confidence in the banking system. The government will also guarantee all ``term wholesale funding'' by Australian banks operating in international credit markets.

Australian business confidence held close to the lowest level in seven years last month, according to a National Australia Bank Ltd. survey of more than 400 companies released today.

Interest Rates

Benchmark interest rates are 6 percent in Australia and 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 1.5 percent in the U.S., luring investors to buy the South Pacific nations' assets using loans in lower-cost currencies. The risk in such carry trades is that exchange-rate fluctuations may erase profits.

Australian government bonds rose for the first day in four. The yield on the benchmark 10-year note fell 9 basis points to 5.45 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 advanced 0.729, or A$7.29 per A$1,000 face amount, to 98.398. A basis point is 0.01 percentage point.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, rose to 6.485 percent today from 6.470 yesterday.

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