31 January 2003, 09:44  Australian Dollar Falls on Record Trade Deficit; Bonds Rise

Sydney, Jan. 31 (Bloomberg) -- The Australian dollar headed for its first losing week in four after a report showed the nation's trade deficit almost tripled to a record in December. The trade deficit widened to A$3 billion ($1.8 billion) from a revised A$1.1 billion in November, the Australian Bureau of Statistics said. A drought has cut exports of milk, wool and meat while imports of aircraft surged. The 13th monthly trade gap underpinned expectations economic growth will slow this year. The currency fell as low as 58.56 U.S. cents, compared with 58.96 U.S. cents before the trade report was released. It bought 58.84 U.S. cents at 4:35 p.m. in Sydney. The Australian dollar has risen 4.6 percent this year, making it the world's best-performing currency out of 59 tracked by Bloomberg data. The trade deficit ``is a negative for the currency,'' said Warren Hogan, head of economics and fixed income strategy at Credit Suisse First Boston in Sydney. Economic growth ``will be lower than previously thought because the drag on gross domestic product from net exports will be a lot greater.'' Hogan said economic growth will probably slow to a 2.5 percent rate this year, from almost 4 percent in 2002.
The 6.5 percent bond maturing in May 2013 rose 0.290, or A$2.90 per A$1,000 amount, to 109.986. Its yield closed down 4 basis points, or 0.04 percentage point, at 5.23 percent. It fell to a low of 5.18 percent after a report showed economic growth in the U.S., Australia's second-largest export market, slowed to 0.7 percent annual pace in the fourth quarter.
Growth Slows
Slower growth in the U.S. will crimp demand for Australia's exports, hastening a cooling in the economy, which is forecast to grow at about 3 percent this year, according to the median forecast in a Bloomberg News survey. Almost 12 percent of Australia's exports are sold the U.S. Bonds may have been helped by expectations the central bank will hold interest rates steady when its board meets to review interest rate policy on Tuesday. Their decision is announced the following day. The bank last raised the benchmark rate by 50 basis points to 4.75 percent in two moves in May and June. Twenty-one of 22 economists surveyed by Bloomberg News expect the bank to keep interest rates unchanged at its first board meeting this year. One is forecasting a quarter percentage point cut. A drop in stocks also boosted bonds' appeal, analysts said. Australia's S&P/ASX 200 stock index had its biggest weekly decline in six months. Bonds fell for the week, after investors balked at yields that had tumbled more than 40 basis points in the past two months. Yields were driven lower in recent weeks as the U.S. administration stepped up the pressure on Iraq to disarm.
Iraq Conflict
Hans Blix, the chief United Nations weapons inspector, on Monday delivered a report saying Iraq failed to provide evidence it destroyed weapons programs, including those involving the VX nerve gas and anthrax. U.S. Secretary of State Colin Powell will address the Security Council Feb. 5 to provide intelligence the U.S. says shows Iraqi leader Saddam Hussein is hiding weapons of mass destruction. ``It appears that the U.S. will try for one last time to go'' with the UN, Susan Buckley, who helps manage A$6 billion in fixed income securities at Queensland Investment Corp. said yesterday. Still, there's the ``seeming inevitability'' of war and that will continue to support bonds, she said. The yield on the 7.5 percent bond maturing in July 2005 shed 2 basis points to 4.57 percent. Hogan is forecasting the yield on the benchmark 10-year bond to fall to 5 percent, and the yield on the three-year government bond to fall to 4.5 percent by the end of March. War rhetoric will ``put downward pressure on yields,'' said CSFB's Hogan. The Australian dollar is likely to appreciate, largely as a result of a weaker U.S. dollar, rising as high as 60 U.S. cents in the first quarter, Hogan said. //www.quote.bloomberg.com

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