Australian, N.Z. Dollars Near 2-Week Lows on Europe Concern

By Candice Zachariahs

Feb. 18 (Bloomberg) -- The Australian and New Zealand dollars traded near two-week lows on concern slumping eastern European economies will exacerbate the global recession, prompting investors to dump riskier assets.

The currencies weakened as commodities slipped the most in a month and crude oil, Australia’s fourth most valuable raw material export, fell below $35 a barrel in New York. A gauge of future economic growth in Australia declined for a second month in December and New Zealand’s Finance Minister said his country’s economy was shrinking for a fifth straight quarter.

Eastern Europe’s problems “darken the outlook a little bit more for small, open economies that are very heavily geared to the global growth cycle,” said Tony Morriss, a senior markets strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “The way for Australia to address this is to have lower rates, a lower currency and further stimulus.”

Australia’s currency slid 0.2 percent to 63.93 U.S. cents at 2:23 p.m. in Sydney from 64.06 cents late in Asia yesterday. It earlier touched 63.34 cents, the lowest since Feb. 3. The currency added 0.3 percent to 58.90 yen.

New Zealand’s dollar touched 50.61 U.S. cents, the lowest since Feb. 5, before trading at 50.93 cents from 50.92 in Asia yesterday. It bought 46.93 yen from 46.69.

The euro fell as low as $1.2559 today, the weakest since Dec. 4, as Moody’s Investors Service said it may cut the ratings of several banks with units in eastern Europe.

The currencies weakened as the MSCI World Index slid for a seventh day, the longest losing streak since Jan. 15. Banks that have subsidiaries in eastern European, including Austrian and Swedish lenders, may face rating downgrades as economies in the region deteriorate, Moody’s said.

Aussie May Drop

Australia’s currency may drop as low as 50 U.S. cents as the global recession drives down commodity prices and the central bank may lower borrowing costs to a record, TD Securities Ltd. said in a research note today.

Traders are betting the central bank will cut its benchmark to 2.25 percent over the next 12 months to spur domestic demand, according to a Credit Suisse index based on swaps trading.

Interest rates of 3.25 percent in Australia and 3.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero percent in the U.S. attract investors to the South Pacific nations’ assets.

“There are reasons to expect that the Australian economy can continue to perform better than its international counterparts,” Reserve Bank of Australia Assistant Governor Malcolm Edey said in Sydney today. The nation will operate in “a difficult international environment this year,” he said.

The Australian currency has declined 26 percent against the greenback over the past six months, while New Zealand’s has dropped 28 percent, as the global recession dulls demand for commodities and riskier assets.

New Zealand Economy

Australia’s dollar may fall to 60 U.S. cents by mid-2009, and New Zealand’s may end the year near 41 cents, Morriss said.

New Zealand’s economy risks further contraction as the nation’s trading partners head into “deeper recession,” Finance Minister Bill English told parliament’s finance and expenditure select committee in Wellington today.

“It is highly unusual for all our trading partners to go into coordinated recession,” English said. The fourth quarter “was pretty much disastrous and most of these economies just hit the wall. The question is whether in the first quarter this has continued or bottomed out.”

Bond Sales

Australia sold A$600 million ($383 million) of bonds today at a weighted average yield of 2.99 percent. Buyers sought 4.8 times the amount offered in the sale of 5.75 percent debt maturing 2012, the Australian Office of Financial Management said.

Australian government bonds rose for a second day. The yield on the 10-year note fell by the most since October, declining 20 basis points, or 0.20 percentage point, to 4.06 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 advanced 1.71, or A$17.1 per A$1,000 face amount, to 109.74.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, fell to 3.23 percent from 3.29 yesterday.

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