Australia Dollar Declines From 23-Year High as Carry Trades Cut

By David McIntyre

Oct. 16 (Bloomberg) -- The Australian dollar fell from a 23-year high as a decline in U.S. stocks caused investors to pare holdings of riskier assets, such as higher-yielding debt bought with money borrowed in Japan.

The currency also declined from an almost three-month high versus the yen as traders cut positions in so-called carry trades after the Standard & Poor's 500 Index lost 0.8 percent in New York, the most in five weeks. The local dollar has been a favorite of the strategy because of Australia's 6 percentage point interest-rate advantage over Japan, which has helped it gain 13 percent against the yen this year.

``The relationship between the carry trade and equities continues, which lent on the Australian dollar,'' said Joanne Masters, a currency strategist at Macquarie Bank Ltd. in Sydney. ``As U.S. equities got softer, so risk appetite came off.''

The Australian dollar fell 0.8 percent to 89.97 U.S. cents at 8:24 a.m. in Sydney, from 90.71 late in Asia yesterday when it reached 90.79 cents, the highest since May 1984. It may decline to 89.60 cents today, Masters forecast.

The currency was at 105.69 yen from yesterday's high of 106.88 yen, the strongest since July 25.

In carry trades, investors secure funds in countries with lower borrowing costs, such as Japan's 0.5 percent, and buy assets in countries with higher rates, like Australia with its 6.5 percent benchmark, earning the spread between the two. The risk is that currency moves erase those profits.

U.S. stocks slid as Citigroup Inc., the largest U.S. bank, posted its steepest loss since Aug. 28 after saying late payments on home loans may worsen in the fourth quarter.

Australia's dollar has jumped 23 percent against the yen from a one-year low on Aug. 17, recovering most of its losses from a 16-year high of 107.73 yen on July 20, reached after investors sold off the currency on concern losses from U.S. subprime mortgages would spread.

Last Updated: October 15, 2007 18:36 EDT