Australian Dollar Pares Decline as Central Bank Slashes Rates

By Candice Zachariahs

Oct. 7 (Bloomberg) -- The Australian dollar pared losses, climbing from a four-year low, as the central bank's biggest interest-rate cut since 1992 prompted speculation policy makers worldwide will slash borrowing costs to revive credit markets.

The Australian dollar, also known as the aussie, traded at 72.67 U.S. cents as of 4:36 p.m. in Sydney, after dropping earlier to 69.9 cents, the weakest since September 2004. The Reserve Bank of Australia lowered borrowing costs 1 percentage point, twice as much as economists had estimated, citing ``serious dislocation in interbank markets.''

``The size of this move supports the idea we could be looking at a concerted round of rate cuts around the world and that's got to be supportive for the aussie'' said Tony Morriss, a senior currency strategist in Sydney at Australia & New Zealand Banking Group.

Australia's currency dropped 24 percent over the past three months, the second-worst performer among the 16 most-traded currencies against the U.S. dollar, on concern the yearlong credit squeeze will tip the world into recession. The Australian and New Zealand dollars slid against the dollar and the yen since July as prices tumbled for commodities the nations export.

New Zealand's currency fell to 61.71 U.S. cents, the lowest since August 2006, before trading at 63.51 cents. It slid 1.8 percent to 65.43 yen from 66.60 yen late in Asia yesterday. It touched 62.06 yen, the weakest since January 2003.

The Australian dollar slipped 2.5 percent to 74.83 yen from 76.74 yen yesterday. It earlier dropped to 70.32, the weakest since March 2003.

``It's been a wild 24 hours for the Australian unit, the market is panicking,'' said Paul Milton, chief foreign-exchange dealer at Societe Generale SA in Sydney.

Rate Cut

RBA Governor Glenn Stevens lowered the overnight cash rate target to 6 percent in Sydney today from 7 percent. Sixteen of 21 economists surveyed by Bloomberg News forecast a 50 basis point cut. Five predicted a quarter-point cut. The central bank will reduce borrowing costs by 2.34 percentage points over the next 12 months, according to a Credit Suisse index based on overnight swaps trading. The index predicted a reduction of 2 percentage points before the RBA announced its decision.

``There will be further easing in Australia, getting to at least 5.5 percent if not below,'' said John Honan, chief economist at Ausbil Dexia Ltd. in Sydney, who helps oversee A$9.5 billion in funds, speaking before the RBA cut.

The S&P/ASX 200 Index added 1 percent to 4,584.8, reversing a drop of 0.5 percent immediately before the Reserve Bank of Australia's decision. The index has lost almost a third of its value this year amid a credit freeze triggered by the U.S. subprime mortgage crisis.

U.S., European Stocks Slide

The Dow Jones Industrial Average fell below 10,000 yesterday for the first time in four years. Europe's Dow Jones Stoxx 600 Index dipped 7.6 percent, its steepest decline since 1987.

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 52.05 yesterday.

Benchmark interest rates are 6 percent in Australia and 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 2 percent in the U.S., luring investors to the South Pacific nations' assets. The risk in such trades is that exchange-rate fluctuations erase profits.

Loss Limits

Losses in the Australian dollar may be limited by speculation that the currency has fallen too quickly. Its relative strength index was recently around 21 against both the dollar and the yen. A reading below 30 typically signals a change in price direction is imminent.

``We've got to be around the lows,'' said Greg Gibbs, a currency strategist with ABN Amro Australia in Sydney. ``Some of the pessimism in terms of risk aversion and the excessive demand for the U.S. dollar will ease and provide a case for strength in the aussie,'' he said.

He expects the currency to strengthen to between 75 and 78 U.S. cents and said that the current lows were a buying opportunity.

Australian government bonds rose. The yield on the three- year note fell 40 basis points or 0.40 percentage points, to 4.478 percent, according to data compiled by Bloomberg. 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 6.730 percent today from 6.810 yesterday.

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