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BLBG: Australian Dollar Pares Decline as Central Bank Slashes Rates
 
By Candice Zachariahs

Oct. 7 (Bloomberg) -- The Australian dollar pared declines that had taken it to the lowest in four years and New Zealand's currency traded at its weakest since 2006 as frozen credit markets heightened concern global economic growth will slump.

The currencies also slid to five-year lows against the yen as stocks in the U.S. and Europe tumbled, spurring investors to dump higher-yielding assets funded in Japan. Australia's dollar has tumbled 25 percent slump in the past three months against the U.S. currency. The Reserve Bank of Australia lowered borrowing costs by 1 percentage point, the biggest cut since 1992, citing ``serious dislocation in interbank markets.''

``It's been a wild 24 hours for the Australian unit, the market is panicking,'' said Paul Milton, chief foreign-exchange dealer at Societe Generale SA in Sydney. ``I don't think you can afford to pick a bottom in this kind of market, it's not where the sentiment lies.''

The currency dropped 2.6 percent to 72.53 cents at 3:24 p.m. in Sydney, heading for a 10th straight decline, from 74.47 cents in late Asian trading yesterday. It reached 69.90 cents, the lowest since September 2004. The Australian dollar slipped 5.3 percent to 72.67 yen from 76.74 yen yesterday. It earlier dropped to 70.32, the weakest since March 2003.

New Zealand's currency fell to 61.71 U.S. cents, the lowest since August 2006, before trading at 62.42 cents. It slid 3.9 percent to 64.02 yen from 66.60 yen late in Asia yesterday. It touched 62.06 yen, the weakest since January 2003.

Rate Cut

RBA Governor Glenn Stevens lowered the overnight cash rate target to 6 percent in Sydney today from 7 percent. Sixteen of 21 economists surveyed by Bloomberg News forecast a 50 basis point cut. Five predicted a quarter-point cut. The central bank will reduce borrowing costs by 2.34 percentage points over the next 12 months, according to a Credit Suisse index based on overnight swaps trading. The index predicted a reduction of 2 percentage points before the RBA announced its decision.

``There will be further easing in Australia, getting to at least 5.5 percent if not below,'' said John Honan, chief economist at Ausbil Dexia Ltd. in Sydney, who helps oversee A$9.5 billion in funds, before the RBA cut.

The S&P/ASX 200 Index added 1 percent to 4,584.8, reversing a drop of 0.5 percent immediately before the Reserve Bank of Australia's decision. The index has lost almost a third of its value this year amid a credit freeze triggered by the U.S. subprime mortgage crisis.

U.S., European Stocks Slide

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.

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 6 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.

Losses in the aussie, as the Australian dollar is called, may be limited by speculation that the currency has fallen too quickly. Its 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.

``We've got to be around the lows,'' 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. He expects the currency to strengthen to between 75 and 78 U.S. cents and said that the current lows were a buying opportunity.

Government Bonds

Australian government bonds rose. The yield on the 3-year note fell 42 basis points or 0.42 percentage points, to 4.454 percent, according to data compiled by Bloomberg. 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 6.730 percent today from 6.810 yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

Source