N.Z. Dollar Declines to Lowest in Two Months on U.S. Housing

N.Z. Dollar Declines to Lowest in Two Months on U.S. Housing

http://www.bloomberg.com/apps/news?pid=20601080&sid=awSit.P8Cxrs&refer=asia

By Emma O'Brien

Aug. 10 (Bloomberg) -- The New Zealand dollar tumbled against the U.S. dollar and the yen on concern subprime mortgage losses from the U.S. will slow global growth, deterring investors from buying riskier investments.

The currency fell to a two-month low against the dollar and to near a three-month low versus the yen. Renewed concern about contagion from the subprime mortgage market was sparked by Paris-based BNP Paribas SA's decision to halt withdrawals from three funds. New Zealand's dollar has been a favorite for the carry trade, where investors use funds borrowed cheaply in yen.

``Subprime is a car that is out of control, it is only a matter of time before it crashes,'' said Alex Sinton, senior currency dealer at ANZ National Bank Ltd. in Auckland. ``The New Zealand dollar is a possum in the headlights of the car out of control.''

The currency bought 75.11 U.S. cents at 8:31 a.m. in Wellington, from 75.83 cents in late Asian trading yesterday. It fell as low as 75.22 today, the lowest since June 18, and is headed for a 1.6 percent decline this week.

The New Zealand dollar may find support at 75.20 today, Sinton said. ``But when the Japanese market opens that has real possibility of being broken.''

It dropped to its lowest in five days against the yen, trading at 88.83, from 90.08 yen late in Asia yesterday, a 1.4 percent decline.

The New Zealand dollar attracts carry-trade investors because the country's record 8.25 percent benchmark interest rate is the highest after Iceland's among Aaa-rated nations. It is 7.75 percentage points higher than Japan's 0.5 percent rate, the lowest of major economies, and three percentage points more than the U.S.' Federal Reserve target.

U.S., European Losses

U.S. stocks fell yesterday, led by financial companies Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., after BNP Paribas, France's biggest bank, halted withdrawals from funds that owned subprime loans, saying it could not value the holdings.

The losses also swept through all 18 western European markets and curtailed a three-day recovery in which U.S. stocks had clawed back almost half the $1.6 trillion wiped out in the previous three weeks. Speculation that more banks and brokerages will report declining values in credit investments exacerbated the selling.

One-month implied volatility on options on the New Zealand dollar was at 13 percent, from 11.8 percent on Aug. 8,. The rise in volatility may encourage investors to avoid riskier investments such as carry trades as it implies an increase in exchange-rate fluctuation risk.

The yield on the New Zealand government two-year bond fell 2 basis points, or 0.02 percentage point, to 7.78 percent. The yield on the 10-year note gained 1 point to 6.58 percent. Bond yields move inversely to prices.