Aussie, Kiwi Dollars Fall as Greece Concerns Sap Risk Demand

Feb. 25 (Bloomberg) -- Australia’s dollar weakened, reversing earlier gains, as speculation Greece won’t be able to push through fiscal cuts needed to gain European Union help in paying its debts undermined demand for higher-yielding assets.

The so-called Aussie pared this month’s advance versus the U.S. dollar after Standard & Poor’s said yesterday it may downgrade Greece’s credit rating by the end of March. Demand for the South Pacific nations’ currencies also declined as Asian stocks and commodities fell. Concern over Greece’s sovereign risk may prompt the Reserve Bank of Australia to keep borrowing costs unchanged at next week’s meeting, Barclays Capital said.

“The risk remains that concerns about sovereign credit ratings in the euro area could lead the RBA to hold off once again,” said David Forrester, a currency economist at Barclays in Singapore. “The news flow on this front remains discouraging and a bit of a weight on the Australian dollar.”

Australia’s currency dropped to 89.20 U.S. cents as of 12:51 p.m. in Sydney, from 89.37 cents yesterday in New York, reversing earlier gains of as much as 0.2 percent. It is up 1 percent so far this month. It fell to 80.13 yen from 80.56 yen.

New Zealand’s dollar declined to 69.05 U.S. cents from 69.34 cents. The so-called kiwi fell to 61.98 yen from 62.50 yen.

The South Pacific nations’ currencies declined as the MSCI Asia Pacific Index of regional shares slumped 0.1 percent, having earlier gained as much as 0.2 percent.

“We believe that a further downgrade of Greece of one to two notches is possible within a month,” S&P analysts led by Marko Mrsnik in London said in a statement that was released late Feb. 24.

Greece Rating

S&P cut Greece’s rating in December from A- to BBB+ and signaled then it may reduce the grade again. The government has since struggled to persuade investors it can slash the budget deficit from last year’s 12.7 percent of gross domestic product without outside help or a default.

Declines in the New Zealand dollar were tempered after Federal Reserve Chairman Ben S. Bernanke said the U.S. needs low interest rates, safeguarding the South Pacific nation’s yield advantage.

“Expect yield support for the New Zealand dollar again to factor throughout trading today,” said David Croy, a strategist at ANZ Investment Bank in Wellington. Bernanke “reassured markets that it will be a long process to revert to normalization,” he said.

U.S. Rates

Bernanke said the U.S. economy is in a “nascent” recovery that still requires low borrowing costs to encourage demand from consumers and businesses once federal stimulus expires.

“A sustained recovery will depend on continued growth in private-sector final demand for goods and services,” Bernanke told the House Financial Services Committee in Washington yesterday at the start of his two days of semi-annual testimony before Congress. “Private final demand does seem to be growing at a moderate pace.”

Benchmark interest rates are 3.75 percent in Australia and 2.5 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.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates which is sensitive to rate expectations, rose to 4.155 percent today from 4.1478 percent yesterday.

Australian government bonds rose for a second day. The yield on the benchmark 10-year note fell two basis points to 5.53 percent, according to data compiled by Bloomberg. The 5.25 percent security due March 2019 advanced 0.12, or A$1.20 per A$1,000 face amount, to 98.04.