Australian, New Zealand Dollars Fall on Outlook for Lower Rates

By Candice Zachariahs

Oct. 1 (Bloomberg) -- The Australian and New Zealand dollars fell to the lowest in more than a week on speculation their central banks will cut interest rates to combat slowing economic growth.

Australia's currency dropped for a sixth day and New Zealand's for a fourth as the U.S. dollar advanced on reports the U.S. Senate will salvage a $700 billion bank-bailout plan as early as today. The two currencies also declined as commodity prices weakened. Gold, Australia's third most-valuable raw material export, yesterday completed its biggest quarterly loss since 2004.

``U.S. dollar strength across the board last night saw the Aussie and kiwi lower,'' said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney, referring to the two currencies by their nicknames. ``In the medium term, the trend is still to the downside with the U.S. dollar likely to strengthen, global growth concerns taking commodity prices lower and both central banks cutting rates.''

The Australian dollar fell 1.1 percent to 79.73 U.S. cents as of 4:50 p.m. in Sydney. It touched 78.68 cents, the weakest level since Sept. 18. It declined 0.3 percent against Japan's currency to 84.51 yen.

New Zealand's dollar weakened to 66.42 U.S. cents, the lowest since Sept. 18, before trading at 67.33 U.S. cents from 67.59 cents late in Asia yesterday. The kiwi rose 0.5 percent to 71.40 yen.

The two currencies declined after reports that the U.S. Senate will vote today on legislation that will give Treasury Secretary Henry Paulson broad authority to buy troubled assets from financial institutions.

Wait and See

``We have to see what's going to happen over the next few days as far as Congress is concerned and this package,'' said Glenn Wittingslow, head of foreign-exchange options at St. George Bank Ltd. in Sydney. ``Then we can refocus again on the RBA meeting next Tuesday.''

Investors should sell the Australian dollar if it goes above 80.25 U.S. cents and buy it if it falls below 78.50 cents, Wittingslow said.

Australia's central bank is certain to trim borrowing costs by at least 0.25 percentage point, with an 89 percent chance that it will make a cut twice that size, at its next meeting on Oct. 7, according to a Credit Suisse Group index based on interest-rate swaps. The Reserve Bank of New Zealand is certain to cut interest rates by 0.5 percentage point on Oct. 23, according to a separate Credit Suisse index.

Carry Trades

Benchmark interest rates are 7 percent in Australia and 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 2 percent in the U.S., attracting investors to the South Pacific nations' assets. The risk in such trades is that currency market moves will erase profits.

New Zealand's dollar has dropped 10 percent against the U.S. currency since its central bank reduced borrowing costs for the first time in five years on July 24.

Reserve Bank of New Zealand governor Alan Bollard said today he was not concerned about the level of the currency. ``The kiwi dollar has caused us all some angst at times in the past but really it's at a reasonable sort of level,'' he said in an interview with Radio New Zealand. ``On a trade weighted index it has been reasonably stable.''

Australian government bonds fell. The yield on the benchmark 10-year note rose 4 basis points to 5.43 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 fell 0.294, or A$2.94 per A$1,000 face amount, to 98.555. A basis point equals 0.01 percentage point.

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