By Lukanyo Mnyanda and Candice Zachariahs Oct. 23 (Bloomberg) -- The Australian dollar, headed for the worst year since a currency peg ended in 1983, may drop a further 25 percent through March as a slowing global economy saps demand for the country's raw materials, according to CBA Europe Ltd. The currency, which slid 17 percent in the third quarter, may trade as low as 50.45 U.S. cents, the weakest since Dec. 21, 2001, according to Divyang Shah, chief strategist in London at CBA Europe, a unit of Commonwealth Bank of Australia. The currency, which was at 66.85 U.S. cents at 11:19 a.m. in Sydney, has tumbled with equity markets as investors dump high-yielding assets for safer holdings in the U.S. dollar and Japan's yen. ``Given the deteriorating outlook for commodities, the Aussie is going to remain under pressure,'' Shah said in a telephone interview yesterday. ``Extreme risk aversion is another factor that has weighed on the Aussie.'' Commonwealth Bank is Australia's largest provider of mortgages. Australia's dollar, also known as the Aussie, slumped in the three months through Sept. 30 as the Reuters/Jefferies CRB Index, which tracks commodities futures, dropped more than a quarter. The Baltic Dry Index, a measure of shipping costs for commodities, plummeted more than 66 percent. The country relies on shipments abroad of materials including iron ore, crude oil and coal for about 17 percent of its economy. Risk Appetite The VIX volatility index, a gauge reflecting expectations for stock-market price changes and risk aversion, rose to a record 70.33 on Oct. 17. The S&P 500 has extended its 2008 retreat to 39 percent, poised for the worst yearly performance since 1931. High-yielding currencies including the Aussie, the South African rand and the Brazilian real have also dropped as concern the world economy is headed for recession makes so-called carry trades unattractive. Investors in such trades borrow in countries like Japan and the U.S. where interest rates are at 0.5 percent and 1.5 percent to invest in higher-yielding assets. The benchmark rate is 6 percent in Australia, 12 percent in South Africa and 13.75 in Brazil. The risk is exchange-rate fluctuations can erode profits. The Australian dollar has declined 24 percent versus the dollar in 2008, the fifth-worst performance of major currencies after the rand, Norway's krone, the South Korean won and real. The currency, which reached a 25-year high in July, hasn't lost more than a fifth of its value in a year since it was allowed to trade freely in December 1983, according to data compiled by Bloomberg. Forecasts Slashed Shah expects the Australian dollar will be worth 59 U.S. cents at the end of the first quarter of 2009. The Commonwealth Bank of Australia, which revised its forecast for the Aussie on Oct. 17, expects the currency to recover to 64 U.S. cents by June 30 and then to 75 cents by the end of 2009. Australia and New Zealand Banking Group Ltd. said Oct. 21, it expects the Aussie to drop in each of the coming quarters and reach lows of 60 U.S. cents and 66 yen by the end of 2009. ``We are now forecasting below trend growth through to 2010,'' wrote Tony Morriss, a senior currency strategist at ANZ in Sydney. ``We now expect the Reserve Bank of Australia to cut rates further over coming months -- towards a cash rate of 4.5 percent.'' Craig Ferguson, currency hedge fund manager at Antipodean Capital Management in Melbourne, yesterday said the Australian dollar may drop to 55 U.S. cents. Interest-Rate Cuts The Reserve Bank of Australia is expected to cut its benchmark lending rate by 0.5 percentage point to 5.5 percent on Nov. 4, according to a Bloomberg survey of 16 economists. The rate stood at a 12-year high of 7.25 percent in August. Traders expect the central bank to lower borrowing costs by 168 basis points over the next 12 months according to a Credit Suisse index based on overnight swaps trading. The Aussie, together with the rand and the Mexican peso, was one of the currencies described this week by Goldman Sachs Group Inc. as undervalued by more than 20 percent based on inflation, productivity and terms of trade. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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