Australian Dollar Weakens as Reserve Bank Paused to Gauge Europe Fallout

The Australian dollar fell from the highest since May as the central bank said Europe’s debt crisis would “inevitably weigh” on global growth, fueling speculation it may hold rates unchanged until at least the fourth quarter.

New Zealand’s currency weakened for the first day in four as Asian commodity stocks slid after Greece’s credit rating was cut to junk, raising concerns the world economy may falter. The Aussie snapped a five-day gain as the Reserve Bank said previous rate rises gave them flexibility to leave borrowing costs unchanged at this month’s meeting to gauge the impact of European events, as well as Australia’s inflation outlook.

“The bank will be on hold for at least another month or two and the Aussie has taken a bit of a step back,” said Derek Mumford, a Sydney-based senior consultant at HiFX, a foreign exchange risk management firm. “We haven’t seen the last of the risk aversion in the market.”

Australia’s currency declined to 85.28 U.S. cents as of 4:28 p.m. in Sydney from 85.87 cents in New York yesterday, when it touched 86.67 cents, the most since May 18. The currency fell to 77.78 yen from 78.64. New Zealand’s dollar dropped to 69.06 U.S. cents from 69.47 cents yesterday, when it touched 70.21, its highest in almost a month. It slipped 1 percent to 62.96 yen.

The Aussie extended declines after Reserve Bank of Australia Deputy Governor Ric Battellino said the situation in Europe was “quite worrying,” according to the transcript of a question-and-answer session during a gathering of financial executives in Sydney today.

European ‘Uncertainty’

Europe’s large budget shortfalls are “pretty well unprecedented,” and have in the past been “associated with wars and they’ve usually ended up being sort of solved by periods of inflation,” said Battellino. “So there’s a lot of uncertainty as to how countries can deal with these issues.”

He also said efforts in China to slowdown its growth are “welcome.”

Australia’s central bank boosted the benchmark lending rate in May for the sixth time in seven meetings, the Group of 20’s most aggressive round of interest-rate increases, before keeping borrowing costs unchanged in June.

“These previous actions afforded policy the flexibility to await information on how the recent market uncertainty might affect the global economy, as well as news about the outlook for inflation,” the RBA said today in minutes of the June meeting. The statistics bureau will release second-quarter inflation data on July 28.

“They’re waiting carefully for second-quarter CPI and that implies that the pause will last at least until August,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney. “My suspicion is it will last longer than August and it will probably be later in the year before they return to raising interest rates again.”

Yield Premium

Benchmark interest rates are 4.5 percent in Australia and 2.75 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. The risk in such trades is that currency market moves will erase profits.

Traders are betting there is a better than 70 percent chance that the RBA will hold rates at 4.5 percent through to the end of September, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange.

Bonds Gain

Australian bond futures rose, with the 10-year contract for June delivery at 94.64 on the Sydney Futures Exchange from 94.63 yesterday. The implied yield on the futures stood at 5.36 percent. The implied yield on three-year futures was 4.82 percent.

New Zealand’s dollar slipped from near a one-month high after house prices fell in May for a second month as sales slumped, adding to signs that rate increases may be gradual this year.

Prices dropped 1.4 percent from April when they declined 0.4 percent, according to an index published by the Real Estate Institute of New Zealand Inc. House sales retreated 17.2 percent from a year earlier, the Auckland-based group said today.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates which is sensitive to interest-rate expectations, fell to 4.29 percent from 4.31 yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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