Australia, N.Z. Dollars Weaken as Rate Gap Shrinks Versus U.S.
March 23 (Bloomberg) -- The Australian and New Zealand dollars fell to their lowest in almost three weeks on concern investors will take out money in favor of U.S. assets after the Federal Reserve raised its benchmark interest rate.
The Fed yesterday lifted its target rate a quarter point to 2.75 percent and signaled rates would continue to rise at a ``measured'' pace. Further rate increases will diminish the advantage of Australia's 5.5 percent overnight rate and New Zealand's 6.75 percent benchmark rate, which helped their currencies gain about 9 percent against the U.S. dollar in the past six months.
``The New Zealand and Australian dollars suffer a bit on a day like today because they lose their direct yield support,'' said Nick Bennenbroek, a currency strategist at Brown Brothers Harriman & Co. in New York. ``U.S. rates are catching up and I suspect you'll see a substantial narrowing'' of the yield gap.
The Australian dollar dropped to 77.83 U.S. cents at 12:07 p.m. in Wellington compared with 78.82 cents in late Asian trading yesterday. New Zealand's dollar bought 72.67 U.S. cents compared with 73.70 cents. The Australian dollar traded as low as 77.76 U.S. cents the weakest since March 2. New Zealand's currency fell to 72.56 cents, the lowest since March 3.
The New Zealand dollar may fall to 72 cents this week, Bennenbroek said.
Yield Gap
The difference between Australia's two-year government bond yield and the U.S. comparable bond narrowed 18 basis points in the past month to 1.84 percentage points, compared with an average gap of 2.47 percentage points in the past year. A basis point is 0.01 percentage point.
The gap between New Zealand's two-year government bond yield and its U.S. counterpart narrowed 30 basis points in the past month to 2.55 percentage points, compared with an average gap of 3.36 percentage points in the past year.
Two-year government bonds are considered among the most sensitive to changes in interest-rate policy.
The New Zealand currency, known as the kiwi, also fell today after a government report showed the nation's current in 2004account deficit widened more than expected to a record.
The annual current account gap widened to NZ$9.39 billion ($6.9 billion) from a revised NZ$8.09 billion in the year through September, Statistics New Zealand said. Economists surveyed by Bloomberg News expected the deficit to reach NZ$9.13 billion in the year ended Dec. 31.
Concern about New Zealand's ability to fund the deficit may deter investors from holding New Zealand assets.
``There is a point when the New Zealand dollar will run out of puff and the fundamentals will make it less desirable to hold kiwi assets,'' said Stephen Koukoulas, chief Asian strategist at TD Securities Ltd. in Sydney. ``This may be the start.''
The local currency may fall to 72 cents this week, he said.
New Zealand's economy probably expanded 0.6 percent in the fourth quarter, about half the 1.1 percent pace forecast by the central bank, according to the median forecast of 12 analysts surveyed by Bloomberg News. The report is due at 10:45 a.m. Wellington time tomorrow.
