Australian, New Zealand Dollars Slide on Global Growth Concerns

By Candice Zachariahs

Oct. 8 (Bloomberg) -- The Australian dollar dropped for the 11th day and New Zealand's currency also fell as investors dumped higher-yielding assets on concern the credit crunch will stall the global economy.

The currencies also declined for a fifth day against the yen as U.S. stocks tumbled, sending the Standard & Poor's 500 Index below 1,000 for the first time since 2003. The Australian currency pared losses yesterday after the central bank slashed its benchmark rate by 1 percentage point, its biggest cut since 1992.

``People just lost confidence when the equity markets started to fall and as a result we've seen selling in the aussie,'' said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney, referring to the currency by its nickname. ``The aussie is a barometer of global financial market sentiment so it takes a particularly hard hit.''

The Australian dollar fell 1.1 percent to 70.71 U.S. cents as of 8:21 a.m. in Sydney from 71.50 cents in late Asian trading yesterday. The currency declined 1.6 percent to 71.66 yen, from 72.84 yen.

New Zealand's dollar weakened 0.7 percent to 62.46 U.S. cents from 62.92 cents late in Asia yesterday. It slid 1.2 percent to 63.31 yen.

The currencies slid as U.S. stocks declined sending the S&P and the Dow Jones Industrial Average to the worst yearly retreat since 1937. The S&P 500 Financials Index slumped 12 percent to below its lowest level since 1997 even after Fed Chairman Ben S. Bernanke signaled he is ready to cut interest rates.

The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose for the second day to a record 53.68 yesterday.

Australian and New Zealand currencies are favorites of the carry trade, where investors seek higher returns on investments funded in countries with lower borrowing costs. The risk in such trades is that exchange-rate fluctuations erase profits.

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.

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