Aug. 5 (Bloomberg) -- The Australian dollar fell to a three- month low after Reserve Bank of Australia Governor Glenn Stevens said inflation may slow, allowing for a ``less restrictive stance'' on interest rates. The New Zealand dollar also declined.

Australia's currency dropped for a sixth day as the RBA left borrowing costs on hold at 7.25 percent, with futures contracts showing policy makers will reduce rates this year as the economy cools. Australia's dollar also weakened as prices slid for commodity exports. New Zealand's currency extended the last week's loss to 2 percent after Reserve Bank of New Zealand Governor Alan Bollard said he has scope to lower rates further.

``The RBA statement is clearly a sign they're getting close to a rate cut, and while it's not a smoking gun for a September easing, it does nothing to discourage a market that was already in the mood to factor in the first cut,'' said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. ``The weakness in commodities is not helpful. People are definitely in the mood to sell the Aussie.''

The Australian dollar dropped to 92.09 U.S. cents, the lowest since April 14, before trading at 92.21 cents at 5:38 p.m. in Sydney from 92.79 cents before the RBA's decision and 93.37 cents late in Asia yesterday. The Australian dollar may decline to 91 cents in the ``short term,'' Callow said.

The New Zealand dollar fell to 72.48 U.S. cents from 73.07 cents late in Asia yesterday. It touched 72.42 cents, the weakest since Sept. 19. The currency, known as the kiwi, dropped to 78.07 yen from 78.93 yen.

UBS Cuts Forecasts

UBS AG, the world's second-largest currency trader, reduced its Australian dollar forecasts after the RBA signaled it may cut rates for the first time in almost seven years.

``We lower our Australian dollar forecasts in light of the dovish RBA statement,'' wrote UBS's currency strategists led by Zurich-based Mansoor Mohi-uddin in a research note today.

Australia's dollar may trade at 95 cents in one month and 93 cents in three months, compared with previous forecasts of 97 cents and 95 cents, the strategists wrote. The Aussie may buy NZ$1.30 in one month, versus an earlier estimate of NZ$1.31, they said.

The Aussie has lost more than 6 percent since touching a 25- year high of 98.49 cents on July 16, as signs emerged that the nation's 17-year economic expansion is faltering. The Bureau of Statistics said yesterday that house prices declined in the second quarter for the first time in almost three years.

`Slowed Significantly'

``The Australian economy has slowed significantly,'' Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney, wrote in a research note today. ``We now believe the Australian dollar has reached a peak early in the September quarter and will be adjusting our forecasts over coming days to reflect that view. The depreciation in the Aussie is likely to be orderly.''

Commonwealth Bank had forecast the Australian dollar would reach equal value to the U.S. dollar by the end of the third quarter and then weaken by year-end.

The RBA's rate decision today was expected by all 24 economists surveyed by Bloomberg. The odds of a quarter- percentage point reduction at the Sept. 2 meeting increased to 96 percent from 80 percent yesterday, according to yields on 30-day interbank cash rate futures due in September.

The Aussie also dropped as the Reuters/Jeffries CRB Index of 19 commodities fell 3.4 percent and the UBS Constant Maturity Index of 26 raw materials slid 3.2 percent, the biggest declines since March 19. Exports of commodities such as gold and crude oil, Australia's third- and four most-valuable raw material exports, contribute 17 percent to the economy.

New Zealand's Dollar

The kiwi weakened after RBNZ Governor Bollard said today New Zealand's slowing economy will ease inflation over the next two years, justifying further rate reductions.

New Zealand's dollar was the fourth-worst performer among the 16 major currencies after the Treasury Department said yesterday the economy probably contracted in the second quarter, pushing the nation into recession for the first time in a decade.

``The kiwi has been under a bit of pressure as it looks like the economy is slowing more rapidly than the Reserve Bank was previously expecting,'' said Grant Hassell, who helps manage NZ$3 billion ($2.2 billion) in fixed-income assets as portfolio manager at AMP Capital Investors in Wellington. ``The bigger picture is the New Zealand dollar back down to 65 cents and possibly lower.''

Bollard last month unexpectedly cut the benchmark interest rate by a quarter-point to 8 percent, his first reduction in five years.

Government Bonds

Traders are betting that the RBNZ will reduce rates by at least a quarter-point at its next review in September, according to a Credit Suisse Group index based on swaps trading.

Australian government bonds rose after the RBA's decision. The yield on the benchmark 10-year note fell 7 basis points, or 0.07 percentage point, to 6.03 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security maturing in March 2019 rose 0.484, or A$4.84 per A$1,000 face amount, to 93.925.

New Zealand government debt declined. The yield on the 10- year note rose 4 basis points to 6.14 percent. The price of the 6 percent security due December 2017 fell 0.308 to 99.020. Yields move inversely to prices.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

Last Updated: August 5, 2008 03:42 EDT