Nov. 5 (Bloomberg) -- The Australian and New Zealand dollars declined against the yen on renewed concerns about losses at U.S. banks prompted investors to reduce holdings of higher-yielding assets bought with money borrowed in Japan.

The currencies also slid against the U.S. dollar as Citigroup Inc. said it will report as much as $11 billion in additional writedowns, reducing demand for so-called carry trades. The Australian and New Zealand dollars are the worst performers among the 17 most-actively traded currencies this month on speculation credit-market losses are building.

``The Australian and New Zealand dollar are already underperforming,'' said Sue Trinh, senior currency strategist in Sydney at RBC Capital Markets, the second-most accurate forecaster of exchange rates in the second quarter in Bloomberg surveys. ``More turmoil in the banking industry will see any enthusiasm on carry trades curbed.''

The Australian dollar fell to 105.66 yen at 1:22 p.m. in Sydney from 106.04 yen late in New York Nov. 2. The currency was at 92.12 U.S. cents compared with 92.33 cents.

New Zealand's dollar was at 87.66 yen from 87.92 late last week. It traded at 76.43 U.S. cents from 76.55 cents.

The currency pared losses after a government report showed wages for non-government workers accelerated more than economists expected in the third quarter. Rising wages may stoke inflation and keep New Zealand's interest rate at a record high.

Australia's dollar may drop to 105.40 yen and New Zealand's to 87.40 yen today, said Trinh.

Popular Carry Trades

Citigroup Chairman and Chief Executive Officer Charles Prince resigned yesterday after $6.5 billion of writedowns and losses from the credit markets. Last week, New York-based Merrill Lynch & Co. ousted its CEO Stan O'Neal.

Both the Australian and New Zealand dollars are popular destinations for carry trades, where funds borrowed in countries with lower interest rates are invested elsewhere in search of higher returns.

New Zealand's record 8.25 percent official cash rate is the highest after Iceland's among AAA rated nations. Australia's 6.5 percent cost of borrowing will be raised a quarter-percentage point by the central bank on Nov. 7, according to all 27 economists surveyed by Bloomberg News. Japan's 0.5 percent key rate is the lowest of any major economy.

Carry trades are considered risky because currency fluctuations can erase the profit earned from the rate gap.

Rising defaults on U.S. subprime mortgages, home loans given to high-risk borrowers, caused a reduction in credit in August. Australia's dollar fell 4 percent and New Zealand's currency dropped 7.9 percent against the yen that month.

Gain a Lot of Strength

Australia's dollar has risen 13 percent against the yen this year and reached a 16-year high of 107.85 yen Oct. 31 on bets the country's booming economy will force the central bank to raise the interest rate. The currency also reached a 23-year high 93.43 U.S. cents last week.

``With the current state of the economy and the expected interest rate hikes, we should see the Australian dollar gain a lot of strength in the next few months,'' said Matthew Jones, foreign-exchange strategist at Travelex Australasia Group in Sydney. ``That will help the Australian dollar push up through the 93 cent level and past the recent high we've seen.''

A private measure of inflation prompted traders to raise the odds of a Reserve Bank of Australia rate increase on Nov. 7 to 93 percent today, according to an index calculated by Credit Suisse Group, based on trading in interest-rate swaps. The odds were 92 percent on Nov. 2 and 50 percent two weeks ago.

Consumer prices rose 3.3 percent in the year to October, the largest annual increase in seven months and breaching the 3 percent limit of the Reserve Bank's target range, according to a monthly gauge released by TD Securities Ltd. and the Melbourne Institute.

The yield on Australia's two-year government benchmark note gained 5 basis points to 6.83 percent. New Zealand's two-year bond yield was little changed at 7.23 percent. Bond prices move inversely to yields and a basis point is 0.01 percentage point.

To contact the reporter on this story: David McIntyre in Sydney at dmcintyre2@bloomberg.net

Last Updated: November 4, 2007 21:38 EST