Australian, New Zealand Dollars Slide as Risk Appetite Weakens

By Candice Zachariahs

Nov. 20 (Bloomberg) -- The Australian and New Zealand dollars dropped the most in a week against the yen as a gauge of risk aversion closed at the highest since Oct. 27, prompting investors to dump high-yielding assets.

The currencies also declined versus the dollar as stocks and commodity prices slumped amid concerns over a global slowdown. Reserve Bank of Australia Governor Glenn Stevens yesterday warned against the risk of talking ``ourselves into unnecessary economic weakness.'' The RBA is expected to continue its steepest rate- cutting cycle since 1991 when it meets in December.

``Stock markets are the leader as a reflection of risk appetite and while they remain under pressure it's hard to sense a turn in the outlook for global growth,'' said Tony Morriss, a senior currency strategist in Sydney at Australia & New Zealand Banking Group. ``The pressure will remain on the downside for the Aussie,'' he said, referring to the currency by its nickname.

The Australian dollar dropped 2.6 percent to 61.06 yen as of 8:08 a.m. from 62.70 yen late in Asia yesterday. The currency declined 1.5 percent to 63.75 U.S. cents from 64.72 cents yesterday. It could test 63.5 cents and 60 yen today if Asian equities weaken, Morriss said.

New Zealand's dollar fell 2.2 percent to 52 yen from 53.18. It bought 54.28 U.S. cents from 54.89.

The currencies fell as the VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, closed at 74.45, the highest since Oct. 27.

U.S. stocks sank and benchmark indexes slid to their lowest levels since 2003 on growing concern over the fate of the nation's car industry and economic data signaling the recession is deepening.

Benchmark interest rates are 5.25 percent in Australia and 6.5 percent in New Zealand, compared with 0.3 percent in Japan and 1 percent in the U.S., luring investors to the South Pacific nations' assets. The risk in such trades is that exchange-rate fluctuations erase profits.

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