By Candice Zachariahs
Oct. 7 (Bloomberg) -- The Australian and New Zealand dollars plunged to five-year lows against the yen as frozen credit markets heightened concern global economic growth will slump, spurring investors to dump higher-yielding assets.
The U.S. dollar climbed to a four-year high against the Australian currency and its strongest in two years against New Zealand's as the crunch fed demand for the greenback as a safe haven. The Australian dollar may recoup some of it losses as some traders judge the currency's 25 percent drop in the past three months excessive.
``We've got to be around the lows,'' for the Australian dollar, said Greg Gibbs, a currency strategist with ABN Amro Australia. ``Some of the pessimism in terms of risk aversion and the excessive demand for the U.S. dollar will ease and provide a case for strength in the aussie,'' he said, referring to the currency by its nickname.
The Australian dollar fell 4.8 percent to 73.08 yen at 12:29 p.m. in Sydney from 76.74 yen in late Asian trading yesterday. It earlier dropped to 70.32, the weakest since March 2003. The currency was 3.4 percent weaker at 71.96 U.S. cents, from 74.47 cents yesterday. It fell as low as 69.90, the lowest since September 2004.
New Zealand's currency slid 3.9 percent to 63.99 yen from 66.60 yen late in Asia yesterday. It touched 62.06 yen, the weakest since January 2003. The currency fell to 61.77 U.S. cents, the lowest since August 2006, before trading at 63.04 cents.
Gibbs expects Australia's currency to strengthen to between 75 and 78 U.S. cents and said that the current lows were a buying opportunity.
The two South Pacific currencies tumbled as global stocks slumped. The Dow Jones Industrial Average fell below 10,000 for the first time in four years. Europe's Dow Jones Stoxx 600 Index dipped 7.6 percent, its steepest decline since 1987, and the MSCI Asia-Pacific Index is down 6 percent this week.
The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose to a record 52.05 yesterday.
Benchmark interest rates are 7 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. The risk in such trades is that exchange-rate fluctuations erase profits.
RBA Governor Glenn Stevens will lower the overnight cash rate target to 6.5 percent from 7 percent at 2:30 p.m. in Sydney today, according to 16 of 21 economists surveyed by Bloomberg News. Five forecast a quarter-point cut. The central bank will reduce borrowing costs by nearly 2 percentage points over the next 12 months, according to a Credit Suisse index based on overnight swaps trading.
``Certainly our longer-term differential has come down,'' said John Honan, chief economist at Ausbil Dexia Ltd. in Sydney, who helps oversee A$9.5 billion in funds. ``But nowhere near the extent of the volatility on the currency.'' The currency has fallen 17 percent against the greenback since the beginning of the year and 25 percent versus the yen.
The Australian dollar's relative strength index was recently at 20 against both the dollar and the yen. A reading below 30 typically signals a change in price direction is imminent.
Australian government bonds rose. The yield on the benchmark 10-year note fell 5 basis points to 5.069 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 advanced 0.395, or A$3.95 per A$1,000 face amount, to 101.448. A basis point is 0.01 percentage point.
New Zealand's two-year swap rate, a fixed payment made to receive floating rates, dropped to 6.725 percent today from 6.810 yesterday.