Tuesday, December 11, 2007

Australia, N.Z. Dollars Fall on Prospect of Slower U.S. Economy

By Tracy Withers and Chris Young

Dec. 12 (Bloomberg) -- The Australian dollar and New Zealand dollar fell on speculation the U.S. Federal Reserve's quarter-point interest rate cut won't be enough to prevent the world's biggest economy from stalling.

The local dollars were the worst performing of the 17 most- actively traded currencies as the prospect of a shrinking U.S. economy caused some investors to reduce purchases of higher- yielding assets funded by loans in Japan. The Fed cut the target rate to 4.25 percent, less than some economists had predicted. U.S. stocks fell the most in a month as investors speculated the cut will fail to prevent a recession.

``The Kiwi and Aussie dollars are taking a bit of a beating,'' said Alex Sinton, currency trader at ANZ National Bank Ltd. in Auckland, referring to the currencies by their nicknames. ``Even building in further falls in interest rates, the U.S. economy is under pressure.''

The Australian dollar fell to 87.47 U.S. cents at 9:26 a.m. in Sydney, from 88.90 cents before the Fed statement and 88.55 in Asia yesterday. The New Zealand dollar slid to 77.40 U.S. cents from 78.39 cents yesterday.

Australia's currency slumped 2.4 percent versus the yen to 96.83 and New Zealand's weakened 2.4 percent to 85.70 yen as investors trimmed so-called carry trades.

The two currencies are carry trade favorites, in which investors get funds in a country with low borrowing costs and buy assets where interest rates are higher, earning the difference. The risk in this strategy is that exchange-rate swings erode the gains from interest-rate differentials.

Australia's benchmark interest rate is at an 11-year high of 6.75 percent and New Zealand's a record 8.25 percent. That compares with 0.5 percent in Japan.

Increased Uncertainty

The currencies fell as interest-rate futures contracts on the Chicago Board of Trade showed traders saw 38 percent odds the Fed would cut the target rate by a half-point to 4 percent. Policy makers also pared the discount rate, the cost it charges banks for direct loans, by a quarter-point yesterday to 4.75 percent, disappointing some traders expecting a bigger cut.

``Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation,'' the Federal Open Market Committee said in a statement.

The collapse of the subprime mortgage market has caused $76 billion in losses and writedowns this year and worsened a U.S. housing slump that threatens growth in the third-biggest export market for Australia and New Zealand.

`Shunned Risk Appetite'

``The market has shunned risk assets in a major way,'' said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Sydney. ``The whole funding and credit issues won't go away so it's hard not to see the Aussie and kiwi fall further on this over the next few days.''

Australia's dollar will slide to 86.5 cents and New Zealand's to 76 cents this week, he said.

Banks' strategists have been optimistic on the outlook for the currencies. Australia's will trade at 92 cents by the end of the first quarter, according to the median estimate of 38 analysts surveyed by Bloomberg. New Zealand's will fetch 77 by the end of March, 34 strategists estimate in a similar survey.

Australian and New Zealand government bonds rose. Australia's benchmark 10-year bond snapped four days of losses, pushing the yield 10 basis points lower to 6.18 percent, while the yield of New Zealand's 10-year security fell 4 basis points to 6.43 percent. A basis point is 0.01 percentage point.

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