Australian Dollar Posts Record Two-Day Gain on Global Rescues

By Candice Zachariahs

Oct. 14 (Bloomberg) -- The Australian dollar soared, posting its biggest ever two-day gains against the greenback and the yen, after governments worldwide announced measures to stabilize financial systems. New Zealand's currency also rose.

The currencies, favorites for so-called carry trades, advanced after U.S. stocks rallied the most since the 1930s on a government plan to buy stakes in banks. France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.8 trillion) to guarantee loans and buy stakes in lenders.

``The market's been cheered by all the colossal plans announced since the weekend,'' said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney. ``How long the recovery is going to last will depend crucially on short-term lending costs. Tentatively, the action plans seem to have helped alleviate some of the money market pressures.''

The Australian dollar jumped 5.1 percent to 70.67 U.S. cents as of 11:11 a.m. in Sydney, from 67.24 cents late in Asian trading yesterday. That extended its two-day advance to 7.1 percent. The currency surged 7.5 percent to 72.61 yen, a two-day gain of 11.2 percent.

New Zealand's dollar gained 2.6 percent to 62.22 U.S. cents from 60.65 cents late in Asia yesterday. It advanced 4.7 percent to 63.82 yen.

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.

Australian stocks rose the most in more than a decade 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 is oversold,'' said Sonja Marten, a currency strategist at Dresdner Kleinwort in London, during an interview on Bloomberg TV yesterday. ``If risk aversion retreats the currency might appreciate again.''

The Australian currency has lost 27 percent over the past three months, and New Zealand's is down 18.5 percent. Australia's dollar rose the most since it was freely traded in 1983 versus the greenback on Oct. 13 as traders welcomed coordinated rate cuts by central banks worldwide and efforts by governments to unlock credit markets.

Rudd Guarantees

Prime Minister Kevin Rudd said Oct. 12 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.

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 fell for the fourth day. The yield on the benchmark 10-year note rose 4 basis points to 5.590 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 declined 0.331, or A$3.31 per A$1,000 face amount, to 97.338. 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 6.50 percent today from 6.47 yesterday.

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