By Candice Zachariahs Oct. 8 (Bloomberg) -- The Australian dollar dropped for an 11th day against the greenback and New Zealand's currency fell as investors dumped higher-yielding assets on concern frozen credit markets will stall the global economy. The South Pacific currencies also declined for a fifth day against the yen on speculation investors will reduce bets on Australian and New Zealand securities funded using loans in Japan, where borrowing costs are lower. Increased volatility in financial markets and a rout in global stock markets, which yesterday drove the Standard & Poor's 500 Index below 1,000 for the first time since 2003, is damping the appeal of such trades. ``People just lost confidence when the equity markets started to fall and as a result we've seen selling in the Aussie,'' said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney, referring to the currency by its nickname. ``The Aussie is a barometer of global financial market sentiment so it takes a particularly hard hit.'' The Australian dollar fell 0.6 percent to 71.07 U.S. cents as of 2:01 p.m. in Sydney from 71.50 cents in late Asian trading yesterday, when it touched 69.9 cents, the weakest since September 2004. The Aussie slid to 0.5176 euro, the lowest since Europe's single currency was introduced in 1999, before trading at 0.5232 euro. It also declined 1.2 percent to 72.01 yen. New Zealand's dollar weakened 1 percent to 62.33 U.S. cents from 62.92 cents late in Asia yesterday. It slid 1.6 percent to 63.11 yen. Recession Looms The global economy is headed for a recession next year as U.S. expansion almost grinds to a halt, the International Monetary Fund forecast ahead of a Group of Seven meeting this week. Australian home-loan approvals dropped to a seven-year low in August, according to government figures reported today. Shares tumbled across the Asia-Pacific region today, extending a global sell-off that's wiped out more than $5 trillion of market value in the past week. 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 53.68 yesterday. Australian and New Zealand currencies are favorites of the carry trade, where investors seek higher returns on investments funded in countries with lower borrowing costs. The risk in such trades is that exchange-rate fluctuations erase profits. Benchmark interest rates are 6 percent in Australia, following a percentage point cut announced yesterday, and 7.5 percent in New Zealand. That compares with 0.5 percent in Japan and 2 percent in the U.S., encouraging investors to use yen and dollars to buys the South Pacific nations' assets. Bonds Rose Australian government bonds rose. The yield on the benchmark 10-year note fell 3 basis points to 5.035 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 advanced 0.20, or A$2 per A$1,000 face amount, to 101.723. 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 6.490 percent today from 6.740 yesterday. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

Source