Australia rate cut gives Asia markets heart

Guarded optimism mounted today for a unified international response to the credit crisis ricocheting around the world after Australia…

Guarded optimism mounted today for a unified international response to the credit crisis ricocheting around the world after Australia cut interest rates far more steeply than expected.

Equities across Asia rallied after the Australian central bank cut its benchmark cash rate by 100 basis points, the first move of that magnitude since December 1994. The MSCI Asia ex-Japan stock index gained 0.6 per cent.

"If the need is there to get rates down toward something that's more neutral, then why dilly dally? Get it done in one go," said Brian Redican, an economist at Macquarie. "It's a flexibility other central banks should take careful note of."

The furious sell-off in global equities in recent weeks and the deepening freeze in credit markets has made this week's Group of Seven rich nations' meeting in Washington even more important.

"The key issue is co-ordination of policies, since individual country policies aimed at shoring up confidence of domestic institutions can actually exacerbate systemic risk by altering relative risk between countries," said Ashley Davies, a currency strategist with UBS in Singapore.

Speculation is swirling that China, with US bonds making up the lion's share of its $1.81 trillion in foreign exchange reserves, the world's biggest stockpile, could have a key role to play in any global response.

But Liu Mingkang, the country's banking regulator, denied that Beijing might ride to America's rescue by pumping cash into the United States.

In the second full day of global trading after the US Congress approved a $700 billion bailout intended to reassure markets, it was clear that whatever reassurance had been delivered was insufficient.

Instead, a crisis that began with the overheated US property market was still rocking confidence worldwide.

Japan's Nikkei index of leading shares was down 2 per cent after earlier falling to its lowest level since December 2003.

Even after late-day gains, the Dow Jones Industrial Average closed down 3.5 per cent yesterday, capping its biggest four-day points loss since September 2001.

Looking to avoid potential trouble spots in the global storm, investors turned against South Korea, worried about the country's relatively high level of debt.

The South Korean won dropped 5.7 per cent to the lowest in more than seven years against the dollar, despite assurances from the government that Asia's fourth-largest economy was not facing a currency crisis.

Reuters