Australian Dollar Falls as Investors Pare Carry-Trade Holdings

By Ron Harui and Chris Young


Sept. 1 (Bloomberg) -- The Australian dollar dropped to its lowest level in four months against the yen as a slide in U.S. and Asian stocks prompted investors to pare holdings of higher- yielding investments funded in Japan.

Australia's currency, a favorite of so-called carry trades, declined for a second day after crude oil futures increased as Hurricane Gustav approached the Gulf of Mexico. The Australian dollar was close to its lowest in almost a year against the U.S. currency on speculation Reserve Bank of Australia policy makers will cut interest rates when they meet tomorrow.

``The risk aversion story has weakened the Australian dollar,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``Carry trade sentiment has been hurting it.''

The Australian dollar declined 0.8 percent to 92.66 yen as of 11:40 a.m. in Sydney from 93.36 yen late in New York on Aug. 29. It reached 92.44 yen, the weakest since April 2. The currency, known as the Aussie, fell 0.4 percent to 85.41 U.S. cents from 85.78 cents. It will trade between 85.25 and 87.50 cents this week, Kyriakopoulos said.

The Aussie is a favorite for carry trades because the nation's benchmark interest rate is at a 12-year high of 7.25 percent. That compares with 0.5 percent in Japan and 2 percent in the U.S. In the strategy, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency market moves erase those profits.

Rate Cut Expected

Traders are certain Reserve Bank of Australia policy makers will lower their interest rate by a quarter-percentage point when they meet tomorrow, according to interest-rate futures trading on the Sydney Futures Exchange.

The MSCI Asia-Pacific Index of regional shares slipped 1.3 percent after the Standard & Poor's 500 index fell 1.4 percent on Aug. 29.

Australia's currency also declined as a report showed today that inflation held above the RBA's target range of 2 percent to 3 percent.

Consumer prices rose 4.2 percent from a year earlier, down from 4.6 percent in the 12 months through July, according to a monthly gauge released by TD Securities Ltd. and the Melbourne Institute in Sydney.

The Aussie was little changed after the Bureau of Statistics said the nation's current-account deficit narrowed to A$12.77 billion ($10.9 billion) in the second quarter from a revised A$19.84 billion in the first quarter. The median estimate of 24 economists surveyed by Bloomberg News was for a trade shortfall of A$11.65 billion.

Australian government bonds gained for a second day. The yield on the 10-year bond fell 1 basis point, or 0.01 percentage point, to 5.75 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.187, or A$1.87 per A$1,000 face amount, to 96.204. Yields move inversely to prices.