Short term interest rates up, dollar down. Short term interest rates in Australia reached their highest level in a decade yesterday with yields on 90 day bank bills rising to more than 6.9%, according to Bloomberg. The yields actually rose by around 0.25% yesterday alone as big corporates would only lend at higher rates.

The RBA said this morning the average yield yesterday on 90 day bills was 6.86%.

And the Australian dollar continues to fall. A month ago it peaked at 88.71, on Monday afternoon it was 85.05 and this morning it’s under 82 US as Japanese and other investors sell it off and buy back the yen, unwinding what is called the yen carry trade. The dollar was trading at 81.90. It’s lost 10% since the peak last month.

The rate 90 bank bill rate has jumped half a per cent in the past few weeks and is now at its highest level since August 1996, just as the Reserve Bank’s cash rate of 6.50% is at an 11 year high.

In the US in the biggest and most liquid markets in the world, US three month Treasury bills had their biggest gain since 1989 over night.

Investors sought safety and near cash (the three month bond is the safest short term investment in the US to cash that pays interest) instead of investing it in the stockmarket or lending to companies and other investors.

Bloomberg said the yield on the three-month Treasury bill fell 0.54% to 4.087%. It was the biggest single-day decline since Oct. 13, 1989, when the Dow Jones Industrial Average sank 6.9%. The Dow fell 1.3% overnight.

US Fed Reserve dumps $7 billion into US banking system. The Federal Reserve added $US7 billion of temporary reserves to the US banking system after remaining out if the market on Tuesday for the first time in three months.

The Federal Reserve added $US7 billion of temporary reserves to the US banking system after remaining out of the market on Tuesday for the first time in three months.

That seems to have been a way of seeing how credit conditions went and the Fed seems to have re-entered the market to make sure that rates were not upset by the settlement of the previous week’s Treasury bond auction.

The Fed’s move settled rates and then helped them fall to 4.75%, below the 5.25% federal Funds rate (the Fed’s key rate) and down from the 5.00% before the intervention.

Wall Street falls. Wall Street again fell sharply, wiping out 2007’s rises for the key investment benchmark, the S&P 500.

Driving it this time was the usual collection of fear and concern, which has again shifted to Countrywide Financial Services, America’s biggest mortgage lender after a Merrill Lynch analyst’s report suggested the company might be forced into bankruptcy.

According to Reuters Merrill Lynch said Countrywide could face “effective insolvency” should creditors force it to sell assets at depressed prices.

The S&P 500 dropped for a third day, losing 19.84 to 1,406.70. The Dow shed 167.45, to 12,861.47, sending the Index under 13,000 for the first time since April. The NASDAQ fell 40.29 to 2,458.83.

So far the S&P 500’s 6.1% retreat since August 8 is the biggest five-day loss since October 2002. The Dow’s 5.8% fall over the same period is the biggest since was the largest since January 2003.