Australian, New Zealand Dollars Fall on Renewed Credit Concerns


The Australian and New Zealand dollars declined against the yen after renewed concerns about losses at U.S. banks prompted investors to reduce holdings of higher-yielding assets bought with money borrowed in Japan.

The currencies are the worst performers among the 17 most- actively traded this month as concerns of ongoing problems in the credit market prompted investors to pare so-called carry trades.

The Australian dollar fell to 105.44 yen at 9:51 a.m. in Sydney from 106.04 yen late in New York Nov. 2. The currency was at 92.02 U.S. cents compared with 92.33 cents.

New Zealand's dollar was at 87.74 yen from 87.92 late last week. It traded at 76.54 U.S. cents from 76.55 cents. The currency pared losses after a government report showed wages for non-government workers accelerated more than economists expected in the third quarter.

Australia's dollar may drop to 105.40 yen and New Zealand's to 87.40 yen today, said Trinh. RBC was the second-most accurate forecaster of exchange rates in the second quarter in Bloomberg surveys.

Both the Australian and New Zealand dollars are popular destinations for carry trades, where funds borrowed in countries with lower borrowing costs are invested elsewhere in search of higher returns.

New Zealand's record 8.25 percent official cash rate is the highest after Iceland's among AAA rated nations. Australia's 6.5 percent cost of borrowing will be raised a quarter-percentage point by the central bank on Nov. 7, according to all 27 economists surveyed by Bloomberg News. Japan's 0.5 percent key rate is the lowest of any major economy.

Carry trades are considered risky because currency fluctuations can erase the profit earned from the rate gap.

Rising defaults on U.S. subprime mortgages, home loans given to high-risk borrowers, caused a reduction in credit in August. Australia's dollar fell 4 percent and New Zealand's currency dropped 7.9 percent against the yen that month.

The yield on Australia's two-year government benchmark note gained 5 basis points to 6.83 percent. New Zealand's two-year bond yield was little changed at 7.23 percent. Bond prices move inversely to yields and a basis point is 0.01 percentage point.

 


Bloomberg
11/4/2007 3:41:09 PM