New Zealand Dollar Pares Losses Versus Yen on Interest-Rate Cut

By Candice Zachariahs

Oct. 23 (Bloomberg) -- The New Zealand dollar pared losses against the yen as the central bank cut interest rates to 6.5 percent from 7.5 percent, after earlier touching its lowest in more than six years. Australia's dollar also fell versus the yen.

New Zealand's currency slipped to the lowest since September 2003 as traders speculated the Reserve Bank of New Zealand would cut its cash target by more than the 100 basis points estimated by economists.

``There was a lot of speculation the Reserve Bank would cut aggressively and perhaps more aggressively than 100,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. ``There are a few cowboys disappointed and we've seen the currency rebound a little bit.''

The New Zealand dollar dropped to 56.81 yen before trading at 57.89 yen at 7:44 a.m. in Sydney from 58.84 late in Asia yesterday. Australia's dollar fell 0.3 percent to 65.85 yen from 66.02.

New Zealand's dollar traded at 59.18 U.S. cents, from 59.60 cents in late Asian trading yesterday. It fell to as low as 58.14 U.S. cents before the RBNZ announcement. The Australian dollar rose 0.7 percent to 67.37 U.S. cents from 66.88 cents yesterday.

The Australian and New Zealand dollars fell 36.6 percent and 28.4 percent respectively against the yen over the past three months as equities tumbled, prompting investors to sell higher-yielding assets funding by borrowings in Japan.

Benchmark interest rates are 6 percent in Australia and 6.5 percent in New Zealand, compared with 0.5 percent in Japan and 1.5 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.

Stocks Tumbling

``People are very worried about the global recession,'' said Hampton. ``People are bailing out of growth-sensitive currencies like the kiwi in favor of safe-haven currencies like the yen and the U.S dollar.''

The currencies fell against the yen as the Standard & Poor's 500 Index dropped yesterday to the lowest level since April 2003. Exxon Mobil Corp. tumbled 9.7 percent and Freeport- McMoRan Copper & Gold Inc. plunged 18 percent as crude, copper and gold fell.

The S&P 500 extended its 2008 retreat to 39 percent, poised for its worst yearly performance since 1931.

The VIX volatility index, a gauge reflecting expectations for stock-market price changes and risk appetite, rose to 69.65 yesterday. The VIX rose to a record 70.33 on Oct. 17.

The Australian currency rose for the first day in three against the U.S. dollar as investors speculated the past month's 19 percent drop doesn't reflect the outlook for the country's economy.

The Aussie, as the currency is called, has been ``relatively strong in the last 24 hours, perhaps a belated recognition of its relative banking stability, the fact that its corporates are unlikely to be caught up in over-hedges, recent sharp rate cuts and fiscal stimulus announcements,'' wrote Greg Gibbs, a currency strategist at ABN Amro Australia Ltd. in Sydney.

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