$a Slides As Banks Fight To Buy $us

Sydney Morning Herald

Saturday October 4, 2008

Clancy Yeates

THE deepening global financial crisis has taken the Australian dollar to its lowest level since the credit crunch began, as lenders scramble for US dollars amid spiralling funding costs.

After another tumultuous week the dollar fell to US78.02c yesterday, from US78.69c on Thursday, its lowest close since August last year.

The main issue spooking financial markets is soaring bank funding costs, and they remained near record highs in overseas markets this week, after the US House of Representatives rejected the proposed $US700 billion rescue package.

The chief currency strategist at the Commonwealth Bank, Richard Grace, said US banks were desperately seeking US dollars to shore up their minimum capital requirements and retain investors' confidence. "Banks are scrambling around for US dollars in order to increase their holdings of cash levels, and keep their [capital adequacy] ratio healthy."

This demand for US dollars, combined with a lack of trust between lenders, had forced up the cost of credit and the value of the greenback, Mr Grace said.

An economist at RBC Capital Markets, Su-Lin Ong, said the deteriorating economic backdrop was also hurting the currency because of Australia's dependence on strong export growth.

"Every sign we've seen is pretty poor, from the global credit situation, through to a number of central banks signalling they are preparing to cut rates," she said, referring to expected interest rate cuts in England next week and Europe early next month.

The expected local response of the Reserve Bank, to cut interest rates by 50 basis points next Tuesday, may further erode the attractiveness of the dollar to foreign investors.

© 2008 Sydney Morning Herald

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