Australia's dollar extended this month's loss to 6.6 percent and New Zealand's dollar snapped three days of gains on concern the U.S. government will be forced to bail out Fannie Mae and Freddie Mac, spurring investors to reduce so-called carry trades. Australia's currency also dropped after minutes from the Reserve Bank of Australia's last policy meeting indicated it may soon cut borrowing costs.
The Australian dollar declined 0.8 percent to 95.46 yen at 4:16 p.m. in Sydney from 96.21 yen late in Asia yesterday. It touched 93.15 yen on Aug. 13, the lowest since April 15. The currency weakened to 86.42 U.S. cents from 87.28 cents. It reached 85.93 cents on Aug. 13, the lowest since Jan. 23.
The New Zealand dollar dropped 0.9 percent to 77.81 yen from 78.53 yen late in Asia yesterday. It reached 73.99 yen on Aug. 13, the lowest since Aug. 25, 2006. The currency, known as the kiwi, weakened 1 percent to 70.53 U.S. cents from 71.23 cents. It earlier reached 71.60 cents, the highest since Aug. 8.
The New Zealand and Australian dollars were the worst and second-worst performers, respectively, among the 16 most-active currencies versus the yen today after Barron's said it's likely the U.S. government will need to inject equity capital into Fannie Mae and Freddie Mac.
Benchmark interest rates of 8 percent in New Zealand and 7.25 percent in Australia compare with 0.5 percent in Japan and 2 percent in the U.S., making the currencies a favorite target for carry trades.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits.
Losses in the Australian dollar were limited as prices rose for commodities the nation exports. The Reuters-Jefferies CRB Index of 19 commodities gained for the first time in three days as the price of gold rebounded 1.6 percent.
New Zealand's currency dropped from its highest in more than a week as traders held bets the Reserve Bank of New Zealand will lower borrowing costs in coming months.
RBNZ Governor Alan Bollard cut the benchmark rate in July for the first time in five years and said further reductions are likely as the economy slows. Traders expect the RBNZ will lower borrowing costs by 1.50 percentage points within the next year, according to a Credit Suisse Group index based on interest-rate swaps.