The Australian and New Zealand dollars fell, capping their biggest annual declines on record, as prices slid for commodities the nations export and investors dumped higher-yielding assets amid a worldwide economic slump. The currencies in 2008 reached their highest levels against the U.S. dollar in more than 20 years before sliding in tandem with commodities, which account for more than half the countries’ exports. Oil prices fell yesterday, contributing to the steepest annual drop in raw-materials costs in more than half a century, after a report showed U.S. consumers are the most pessimistic they’ve been in at least 41 years. “Commodity prices are off a bit after the weak consumer sentiment data in the U.S. refocused the market on the global slump,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. Australia’s currency fell to 68.94 U.S. cents as of 12:55 p.m. in Sydney, from 69.37 cents late yesterday in Asia. The currency, which touched a 25-year high of 98.49 cents on July 16, is down 21 percent from end-2007. It was 0.3 percent lower today at 62.28 yen, a 36 percent drop for the year. New Zealand’s dollar slid to 57.66 U.S. cents from 58.01 cents yesterday, and has tumbled 25 percent this year. The currency touched a 23-year high of 82.13 cents on March 14. It bought 52.11 yen from 52.26 yesterday and 86.63 late last year. Australia’s currency may trade between 69 and 69.5 U.S. cents today, Carr said. The Aussie dollar may decline to as low as 65 cents in the first half of 2009 before rebounding to touch 70 cents by the end of June, he said. Lending Slows The Australian dollar extended declines after a report showed lending to Australian consumers and businesses cooled in November, suggesting further slowing in an economy that last quarter expanded at the weakest pace in eight years. The South Pacific nations’ currencies may decline in 2009 as policy makers continue to reduce borrowing costs to boost their economies. Benchmark interest rates are 4.25 percent in Australia and 5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. Australian government bonds surged this year as the Reserve Bank of Australia lowered borrowing costs by three percentage points in the final four months of the year. The RBA’s overnight cash target stood at 6.75 percent a year ago and was raised to a 12-year high of 7.25 percent in March. Federal government bonds returned 16.7 percent this year, their best performance since 1995, according to Merrill Lynch & Co. indexes. That compares with 10.1 percent for U.S. Treasuries. Interest Rates The yield on the benchmark Australian 10-year bond fell three basis points today to 3.99 percent, down from 6.27 percent a year ago, according to data compiled by Bloomberg. The price of the 5.25 percent note maturing in March 2019 rose 0.23, or A$2.30 per A$1,000 face amount, to 110.5, A basis point is 0.01 percentage point. Traders are betting that the Reserve Bank of Australia will lower rates an additional 1.2 percentage points over the next 12 months, while New Zealand’s central bank will cut a further 1.14 percentage points from its benchmark, according to separate Credit Suisse indexes based on overnight swaps trading. The South Pacific currencies tumbled this year as the Reuters/Jefferies CRB Index of 19 raw materials dropped 39 percent in the past 12 months, the most since the measure was introduced in 1957. Prices for coal and oil, Australia’s biggest and fourth-biggest export earners, fell from records in the past six months as a seizure in global credit markets tipped the world into recession. Commodities Tumble The weekly index for thermal coal prices at Australia’s Newcastle, a benchmark for Asia, has dropped 60 percent since a July 4 record and was $77.50 a ton in the week ended Dec. 19, according to the globalCOAL NEWC Index. World prices of butter, milk and cheese, which make up a fifth of New Zealand’s exports, plunged 53 percent from record highs reached 13 months ago. Auckland-based Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, yesterday said it may have to cut payouts to the nation’s farmers as prices and demand soften. The RBA cited “the deterioration in the global growth outlook, declines in commodity prices and general unwinding of leveraged positions,” as weakening the Australian dollar in its Statement on Monetary Policy in November. “Some investors appear to have exited Australian dollar positions as a proxy for unwinding positions in other less liquid markets, including emerging market currencies.” 5 1/2-Year Low The Australian dollar dropped to a 5 1/2 year low of 60.10 U.S. cents in October this year, prompting the Reserve Bank of Australia to make net purchases of its own currency in October and November to provide liquidity in “disorderly conditions.” The last time the bank was a net buyer of the currency was 2001. The so-called Aussie may recover in 2009 to 79 U.S. cents, wrote Sydney-based John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd., in a research note on Dec. 17. His forecast was the most bullish of 41 firms surveyed by Bloomberg News. The average forecast is for the currency to reach a low of 62 cents in the first quarter before recovering to 66 cents by the end of 2009. New Zealand’s dollar, nicknamed the Kiwi, will bottom at 52 U.S. cents in the second quarter and recover to 55 cents by the end of the year, according to the average forecast of 39 institutions polled by Bloomberg News. Prime Minister John Key said he thought the nation’s currency “would print with a 4 in front of it at some point against the U.S. dollar,” on Television New Zealand’s Agenda program Dec. 7. “My personal view is it will go lower,” he said after the kiwi closed that week trading at 53.11 U.S. cents. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

Source