Australian, New Zealand Dollars Fall to Lowest in Five Years

By Lilian Karunungan and Candice Zachariahs

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

The Australian currency fell the most since 1983 as rising exchange-rate swings, a drop in commodity prices and a rout in stock markets damped the appeal of the so-called carry trades. It tumbled for the 11th day against the U.S. currency, losing 21.3 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.

``Oh my god! It's quite extraordinary,'' said Thomas Harr, a Singapore-based senior currency strategist at Standard Chartered Plc. ``As long as we have this credit crisis and global stocks markets collapse, then there's no end for these things going on. The only clear winners here are the U.S. dollar and especially the yen.''

The Australian dollar fell as much as 9.8 percent to 64.51 U.S. cents, the weakest level since 2003, before trading at 66.99 cents as of 12:02 p.m. in London, from 71.50 cents in late Asian trading yesterday. It rebounded following a half percentage point rate cut by the European Central Bank, the Federal Reserve and other central banks. The so-called Aussie slid 9.6 percent to 65.88 yen, after touching 63.75, the lowest since 2002.

New Zealand's dollar dropped as much as 7.95 percent to 57.92 U.S. cents, the weakest since 2003, before trading at 60.25. It slid 6.9 percent to 59.70 yen.

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.''

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.

Copper declined $330, or 5.9 percent, to $5,300 a ton. Tin dropped to a one-year low and nickel declined to the lowest in 33 months. Raw materials account for 60 percent of Australia's exports and sales of commodities such as lumber make up 70 percent of New Zealand's overseas shipments. Gold and crude oil are Australia's third and fourth most-valuable raw material export.

``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 17.6 percent since the beginning of October and 33 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: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.