The Australian and New Zealand dollars declined amid concerns Europe’s debt crisis is damaging public support for German Chancellor Angela Merkel’s party and making it harder for banks to borrow among themselves. Both currencies fell against the yen before reports that economists said will show growth in the 17-nation euro area is slowing. The so-called kiwi dropped against all of its 16 major peers as Asian stocks declined for a second day. The Australian dollar pared its drop after a statistics bureau report showed second-quarter profits rose more than economists estimated. “Merkel’s election loss undermines the whole euro-zone and has put the euro under pressure and there’s also talk of more bank funding problems in Europe,” said Tim Kelleher, Auckland- based head of institutional foreign-exchange sales at ASB Institutional, a unit of Commonwealth Bank of Australia. “The Aussie and kiwi will come off, but should find buyers on dips.” Australia’s dollar fell to $1.0596 as of 11:43 a.m. in Sydney from $1.0645 in New York on Sept. 2. The currency declined to 81.36 yen from 81.75 yen. New Zealand’s dollar slid to 84.39 U.S. cents from 84.81 cents last week and lost 0.5 percent to 64.79 yen. Merkel’s Christian Democratic Union suffered its fifth election loss this year after she failed to sway voters in her home state with a campaign based on her handling of the debt crisis. The Social Democrats, the main opposition party nationally, took 36.1 percent to win yesterday’s vote in Mecklenburg-Western Pomerania, ZDF television projected. Funding Pressure Banks are seeking to retain their liquidity, making interbank lending more difficult, as funding from money and capital markets becomes harder to obtain, ABN Amro Group NV Chief Executive Officer Gerrit Zalm said yesterday on the Dutch television program “Buitenhof.” Banks are reluctant to lend to competitors with “big positions in weaker countries’ debt, for instance,” he said. European services and manufacturing growth fell to 50.9 in August, the slowest pace in almost two years, according to economists in a Bloomberg News poll taken before Markit Economics releases its index based on a survey of euro-area purchasing managers. A reading above 50 indicates growth. The MSCI Asia Pacific Index fell 1.8 percent from last Friday when it slumped 1 percent. The Standard & Poor’s 500 Futures signaled U.S. stocks may also extend last week’s declines. RBA Rates Policy The Australian dollar’s decline was limited as the Reserve Bank of Australia is expected to keep rates unchanged at its policy meeting tomorrow, according to the median estimate of 25 economists in a Bloomberg survey. The Aussie dollar fell 0.3 percent against its nine majors peers as tracked by Bloomberg Correlation-Weighted Currency indexes. “There’s a very small probability that they’ll cut and as that becomes clear, we’ll see sentiment strengthen towards the Aussie dollar,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd. Demand for the Aussie also was bolstered after government data showed gross operating profits increased 6.7 percent in the three months ended June from the first-quarter, compared with the median estimate in a Bloomberg News survey for a 2.9 percent increase. A Credit Suisse Group AG index based on swaps trading shows a 22 percent chance the Reserve Bank of Australia will cut its benchmark rate by 25 basis points tomorrow, compared with a 100 percent probability that was indicated on Aug. 19. All 25 economists surveyed by Bloomberg News expect the RBA to hold borrowing costs unchanged. Benchmark rates are 4.75 percent in Australia and 2.5 percent in New Zealand, compared with as low as zero in the U.S. and Japan, attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits. New Zealand Confidence The kiwi dollar’s decline was limited after a private report which showed business confidence rose this month after slumping to a four-month low in August amid global financial turmoil. Bank of New Zealand said the proportion of optimists expecting the economy to be better in a year’s time rose to 53 percent from 45 percent in August, based on its survey of 531 companies in the week ended Sept.2. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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