By Candice Zachariahs Oct. 10 (Bloomberg) -- Australia's currency plunged by the most this week since it began trading freely in December 1983 as stocks slumped worldwide, prompting investors to cut holdings of higher-yielding assets funded with loans in Japan. The Australian dollar declined 19 percent against the yen and New Zealand's dollar lost 15 percent as global equities erased more than $8 trillion in market capitalization this month. Australia's central bank lowered interest rates by 1 percentage point, the most since 1992, setting off a round of coordinated cuts by other central banks, which failed to unlock credit. ``Cutting interest rates doesn't necessarily change the underlying problem in the credit markets,'' said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong. ``Panic, significant nervousness and fear'' is spreading among investors in the equity markets. The Australian dollar fell to 65.76 yen as of 3:15 p.m. in Sydney from 81.48 yen a week ago in New York. It traded at 66.54 U.S. cents from 77.40 on Oct. 3, a loss of 20 percent for the week. The New Zealand currency declined to 59.04 yen from 69.76 on Oct. 3 and dropped 9.6 percent this week against the U.S. dollar to 59.76 cents. The Reserve Bank of Australia reduced borrowing costs to 6 percent on Oct. 7 to spur lending. The Federal Reserve, European Central Bank, Bank of England, Bank of Canada and Sweden's Riksbank all followed. Switzerland, Taiwan, China and South Korea also cut their benchmark rates. Money Market Rates The coordinated response and central bank fund injections to alleviate the global credit crisis failed to bring interbank money market rates down. Australia pumped in A$2.63 billion ($1.8 billion) into the system today after the cost of borrowing in dollars for three months in London soared to the highest level this year. The difference between the rate Australian banks charge each other for three-month loans and the overnight indexed swap rate gained to 108 basis points in Sydney, from 89 yesterday. ``Rate cuts at this stage, particularly from the ECB and the Bank of England, were too little too late,'' said Sally Auld, interest-rate strategist at JP Morgan Securities Australia Ltd. ``What markets are telling you is that it doesn't actually matter what central banks and governments do.'' The Australian and New Zealand dollars also dropped as crude oil, Australia's fourth-most valuable raw material export, fell to an 11-month low on concern fuel demand will cool. Commodities Declined Futures touched $82.07 a barrel, the lowest intraday price since October 2007. Raw materials account for 60 percent of Australia's exports, and 70 percent of New Zealand's. ``Slowing global growth will continue to put downside pressure on currencies that display a strong link to cyclical forces, such as the Australian dollar,'' wrote Goldman Sachs Group Inc. currency strategists led by London-based Thomas Stolper in a research note dated yesterday. The MSCI Asia Pacific Index of regional shares headed for a weekly drop of 18 percent, the biggest slump since the index was created in 1987, reducing demand for higher-yielding assets. The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose above 60 to a record yesterday. The currencies are favorites of so-called carry trades, 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 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 1.5 percent in the U.S. Australian government bonds were little changed, with the yield on the 10-year note at 5.093 percent, according to data compiled by Bloomberg. New Zealand's two-year swap rate, a fixed payment made to receive floating rates, fell to 6.430 percent today from 6.490 yesterday. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

Source