The Australian dollar dived to its lowest in 25 months against the yen and fell to a fresh one-year low against the U.S. currency on Friday, undermined by a fresh bout of risk aversion.

Australian bond futures surged, buoyed by safe-haven inflows, but other asset classes from commodities to stocks suffered on mounting concerns about slowing global economic growth.

Those worries drove Wall Street and regional stock markets lower and encouraged edgy investors to unwind leveraged carry trades, where they borrow in the cheaper yen to buy riskier assets and high-yielding currencies like the New Zealand dollar <NZD=> or the Aussie.

“It is all about risk aversion, with the yen rallying strongly,” said Akash Reddy, economist at Citi.

“The Aussie and the New Zealand dollar have both been hammered. There is little to be said other than it has been dramatic and there is no end in sight.”

The Australian dollar fell to 85.84 yen <AUDJPY=R>, its lowest since July 2006, and down 5 percent from 90.38 yen late here on Thursday, but recovered later on Friday to around 87.23 yen.

The Aussie <AUD=> extended losses to fresh one-year lows against the U.S. currency, easing to $0.8100, before recovering some ground to $0.8171 by 4:20 p.m. (0620 GMT).

The Aussie was also weighed down by lower commodities prices, which lost ground on expectations a slowing global economy would dent demand for resources. Those worries have seen investors unwind the long commodities/short U.S. dollar trade, giving a boost to the greenback.

“The fall in oil and gold prices and the downshift in local rates expectations has exacerbated the Aussie dollar’s fall,” said Amy Auster, head of foreign exhange research at Australia & New Zealand Banking Group.

“The incredible rise of the U.S. dollar over the past six weeks has longer-term implications for the Australian dollar. We are revising our currency forecasts from a previous forecast of $0.9000 to $0.8600 for year-end.”

The U.S. dollar has been supported by expectations that economies outside the United States were starting to see a sharp slowdown caused by the global credit crunch.

The European Central Bank (ECB) held interest rates steady, but President Jean-Claude Trichet said economic data pointed to weakening growth at mid-year.

The Bank of England also kept rates unchanged but did nothing to douse expectations that recession worries will prompt a cut before the end of the year [ID:nL4343600].

Earlier this week, the Reserve Bank of Australia (RBA) lowered the cash rate by 25 basis points to support rapidly cooling consumer demand. Markets are pricing in a handy chance of another cut early next month.

Australian bond futures jumped on the renewed flight to safety, reversing their losses from earlier this week after the RBA disappointed some bond investors by not sounding as dovish as many had expected after its policy board meeting.

Three-year bond futures <YTTc1> climbed 0.120 points to 94.480, while the 10-year bond contract <YTCc1> jumped 0.145 points to rise to 94.40.

—————–(Snapshot at 4:20 p.m./0620 MT)—————

FUTURES CASH YIELD

90-DAY BILL<YBAc1> (SEP) 92.830(+0.02) <AU3MBB=RR> 7.20 (7.20)

3-YR BOND <YTTc1> (SEP) 94.480(+0.120) <AU3YT=RR> 5.52 (5.65)

10-YR BOND <YTCc1> (SEP) 94.400(+0.145) <AU10YT=RR> 5.62 (5.78)

AUD/USD <AUD=> 0.8171 (0.8365) US 10-YR <US10YT=RR> 3.61 (3.73)

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AUD VS 2-YR 10-YR *AUD 3-YR/10-YR SPREAD

USD +340 (+341) +201 (+206) *FUTURES +0.080 (+0.105)

CAD +289 (+299) +218 (+229) *AUD 2-YR/10-YR SPREAD

NZD -42 (-34) -33 ( -21) *CASH +05 ( +08)

—————————————————————-

Source: http://www.afxnews.com

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