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Australian Dollar Posts Weekly Loss on Concern Exports to Drop
June 25 (Bloomberg) -- The Australian dollar posted its first weekly loss in three against the U.S. currency on expectations global economic growth will slow, denting demand for commodity exports such as copper.

The currency dropped as concern grew record oil prices will damp the world's growth. Crude oil reached a record $60 a barrel in New York this week, and The Dow Jones Industrial Average June 23 had its biggest loss in 10 weeks. Australian stocks also fell every day this week, led by miners such as BHP Billiton.

``Confidence in global activity is waning,'' said Greg Gibbs, a Sydney-based currency strategist at RBC Capital Markets. ``It's a warning for commodity currencies like the Australian dollar.''

The Australian dollar fell to 76.94 U.S. cents late in New York yesterday from 77.80 cents at the New York close a week ago. The currency will drop to about 76 cents next week, Gibbs said.

Australia is the world's largest supplier of nickel and the fourth-biggest exporter of copper. Raw materials account for almost 60 percent of all exports.

Nickel fell 10 percent this week on the London Metal Exchange to $14,550 a ton because of slowing demand from stainless-steel producers, the largest nickel buyers. Copper prices fell 3.3 percent on the Comex division of the New York Mercantile Exchange on concern production is rising as demand slows.

`Hit Hard'

Copper and the Australian dollar had a 0.82 correlation in the past year. A reading of 1 suggests the two move lock-step.

``Metals don't have to crash for the Australian dollar to get hit extremely hard,'' said Callum Henderson, a currency strategist at Standard Chartered Plc. in Singapore. ``The global economy will gradually slow and that will impact demand for all manor of commodities, including metals.''

He forecast the currency will weaken to 74.80 cents in the next three months. Earlier this week, it rose to a six-week high of 78.09 cents and a five-year high versus the euro of 0.6434.

Investors have been buyers of the Australian dollar to access the higher yields available on its financial assets.

The difference in yield between 10-year Australian and U.S. government bonds this week widened to the most in four months, while the yield spread between Australian and German 10-year bunds expanded to an eight-year high, as traders increased bets the European Central Bank will cut interest rates.

`Supportive'

Australia's 5.5 percent overnight cash rate target exceeds the Federal Reserve's 3 percent lending rate and the European Central Bank's 2 percent benchmark rate. Speculation has mounted that Europe's key borrowing cost will be cut after Sweden's Riksbank slashed its target rate on June 22 to promote growth, and minutes released June 23 showed two of nine Bank of England officials voted for a cut in rates.

``Growing expectations of lower interest rates around the world are supportive of high-yielding currencies,'' said Harvinder Kalirai, chief market analyst in Sydney at State Street Corp., the world's largest custodian of assets. He forecasts the Australian dollar will rise to 85 cents within a year.

The yield on the 10-year Australian government bond fell 15 basis points, or 0.15 percentage point, to 5.09 percent, 1.13 percentage points more than U.S. Treasuries of a similar maturity, compared with a yearly average of 1.21 points.

Some local fund managers are turning bearish on the Australian dollar, said Standard Chartered's Henderson.

``We're seeing Australian fund managers who invest abroad taking off their currency hedges, exacerbating Australian dollar weakness,'' he said. Investors hedge to protect overseas holdings against gains in the currency that would erode their value.



To contact the reporter on this story:
Chris Young in Sydney at [email protected]

Last Updated: June 24, 2005 20:19 EDT



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