By Candice Zachariahs Dec. 19 (Bloomberg) -- The Australian and New Zealand dollars dropped as equities fell after General Electric Co’s debt-rating outlook was changed to negative, prompting investors to shun higher-yielding assets. The currencies declined for the first day this week as crude oil, Australia’s fourth-most valuable commodity export, fell below $36 a barrel for the first time since 2004. The world economy will contract next year for the first time in almost half a century, according to the Institute of International Finance, which represents the world’s largest banks. “The GE downgrade is another sign the world economy is in big trouble,” said Joe Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia Ltd. “For a small, open economy like Australia, our fortunes are tied to what happens overseas. We think the Aussie is going to end the year around 64 U.S. cents,” he said, referring to the currency by its nickname. Australia’s currency pared loses after falling as much as 4.5 percent, the most since Oct. 24, and traded at 68.42 U.S. cents as of 12:18 a.m. in Sydney from 70.86 cents late in Asia yesterday. The currency slid 1.3 percent to 61.90 yen. New Zealand’s dollar dropped 3 percent to 58.45 U.S. cents from 60.22 in Asia yesterday and bought 52.31 yen. The currencies slipped after Standard & Poor’s said GE, the world’s biggest insurer of corporate bonds, has a one-in-three chance of losing its AAA credit rating in the next two years as earnings deteriorate. ‘Unholy Trinity’ The global economy has been hit by an “unholy trinity” of financial problems, the Institute of International Finance said yesterday. Banks lack adequate capital to cover holes in their balance sheets as they struggle to raise funds after suffering big losses on troubled assets, it said. The Australian and New Zealand dollars were set for their second consecutive weekly gains, having strengthened over the last four days as the Federal Reserve reduced U.S. borrowing costs to as low as zero, fueling demand for currencies offering better returns. The Reserve Bank of Australia signaled in the minutes of its December meeting, released Dec. 16, that it may slow the pace of its most aggressive rate cuts since 1991. Australia’s dollar advanced 4.2 percent from 66.44 cents in New York last week and 2.3 percent from 60.52 yen. New Zealand’s currency gained 6.9 percent from 54.68 in New York on Dec. 12 and 4.8 percent against the yen. Investors should buy the Australian currency against the U.S. and New Zealand dollars in 2009 as weak economic data in both those countries “start to favor the Australian dollar,” wrote Sydney-based Joshua Williamson, a senior strategist at TD Securities Ltd., in a research note dated Dec. 18. “Any signs of a global recovery, if indeed there is such a surprise, would further support the Australian dollar.” Annual Slide The Australian dollar has dropped 20 percent against the U.S. dollar in 2008 and 37 percent versus the yen as slumping commodities and a global recession damped demand for the nation’s assets. New Zealand’s currency declined 23 percent versus its U.S. counterpart and 40 percent against the yen. Australian government bonds were little changed with the yield on the 10-year note at 4.05 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 fell 0.042, or A$0.42 per A$1,000 face amount, to 109.958. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, slid to 4.61 percent from 4.63 yesterday. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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