Australian Dollar Rises to Near 25-Year High; N.Z. Dollar Gains

By Ron Harui and Tracy Withers

June 30 (Bloomberg) -- The Australian dollar rose to near a 25-year high as prices of the nation's iron ore and coal exports climbed to records. The New Zealand dollar gained on prospects the Federal Reserve isn't ready to start raising interest rates.

Australia's currency headed for its biggest quarterly gain since the last three months of 2006 as the UBS Bloomberg Constant Maturity Commodity Index rose to a record on June 27, taking the index's advance this year to 32 percent. New Zealand's currency rose to a one-week high as traders pared bets that the Fed will increase borrowing costs in August.

``The terms of trade backdrop still points to further gains in the Australian dollar,'' wrote Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney, in a note to clients.

The Australian dollar rose to 96.31 U.S. cents at 10:45 a.m. in Sydney from 96.10 cents late in New York on June 27. It reached 96.54 cents on May 21, the most since February 1983. It has gained 5.5 percent this quarter and 10 percent this year.

The New Zealand dollar climbed to 76.31 U.S. cents from 76.08 cents late in New York on June 27. It earlier reached 76.35 cents, the highest since June 23. It has declined 2.9 percent this quarter and 0.4 percent this year.

Prices of raw materials influence the Australian dollar, also known as the Aussie, because commodity exports contribute about 17 percent to Australia's economy. The Aussie advanced last week as Rio Tinto Group said China agreed to pay a record price for iron ore, the nation's largest overseas shipment.

RBA Meeting Tomorrow

Australia's dollar was also supported after an index measuring the nation's inflation rose in June, reinforcing expectations the Reserve Bank of Australia will keep borrowing costs at a 12-year high tomorrow.

Consumer prices surged 4.8 percent from a year earlier, breaching the 3 percent limit of the RBA's inflation target, according to a monthly gauge released by TD Securities Ltd. and the Melbourne Institute in Sydney today. Prices climbed 0.5 percent from May, when they rose 0.3 percent.

RBA Governor Glenn Stevens will leave the overnight cash rate target at 7.25 percent tomorrow in Sydney, according to all 25 economists surveyed by Bloomberg News. Six say the central bank will raise the rate by the end of the year and one forecasts a cut.

New Zealand's dollar gained for a fourth day as futures on the Chicago Board of Trade show a 25 percent chance the Fed will raise its 2 percent benchmark rate by a quarter-percentage point at the Aug. 5 meeting, compared with 40 percent odds a week ago.

The benchmark rate is 8.25 percent in New Zealand, the highest of any Aaa rated nation and 6.25 percentage points higher than the U.S.

`Scaling Back'

``A weaker U.S. dollar, thanks to the scaling back of Fed tightening expectations and in anticipation of an ECB hike, is likely to provide some support to the New Zealand dollar,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. Still, New Zealand economic reports are expected ``to support the case for rate cuts'' from the Reserve Bank of New Zealand, she said.

Gains in New Zealand's currency may be limited after a report June 27 showed the economy contracted 0.3 percent in the first quarter. At least eight of 13 economists surveyed by Bloomberg News expect the economy also shrank in the second quarter, putting New Zealand into its first recession since 1998.

RBNZ Governor Alan Bollard said on June 5 it's ``likely'' he will cut borrowing costs from a record 8.25 percent this year because weak growth is slowing inflation. He forecast the economy will rebound in the second quarter after shrinking in the three months ended March 31.

Australian Bonds

Ten of 13 economists expect Bollard will cut rates in September. Two expect a cut at his next review on July 24 and one forecasts the first reduction in borrowing costs in October.

Australia's 10-year government bonds rose, pushing the yield down 1 basis point, or 0.01 percentage point, to 6.45 percent. The price of the 5.25 percent bond maturing in March 2019 climbed 0.073, or A$0.73 per A$1,000 face amount, to 90.810.

New Zealand's government debt was mixed. The 10-year bond yield was unchanged from June 27 at 6.35 percent, while the three-year yield fell 2 basis points to 6.37 percent. Bond yields move inversely to prices.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Tracy Withers in Wellington at twithers@bloomberg.net