Australian, N.Z. Dollars Rise as Fed May Delay Raising Rates

By Lilian Karunungan and Ron Harui

June 25 (Bloomberg) -- The Australian and New Zealand dollars climbed on speculation the Federal Reserve will delay raising interest rates, maintaining the yield advantage offered by the two South Pacific nations.

Australia's dollar, known as the Aussie, rose to a two-week high as traders pared bets the Fed will increase borrowing costs after U.S. reports yesterday showed consumer confidence fell to a 16-year low and housing prices slumped. New Zealand's dollar, nicknamed the kiwi, ended two days of losses as investors were attracted to the nation's 8.25 percent benchmark interest rate, the highest of any country with an Aaa credit rating.

``We still expect the Fed to hold steady,'' said Emmanuel Ng, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. ``The yield advantage will be there. That continues to underpin the other dollars like the Aussie and the kiwi.''

Australia's dollar rose to 95.60 U.S. cents as of 4:39 p.m. in Sydney from 95.36 cents late in Asia yesterday. It has risen 4.6 percent this quarter and 8.9 percent this year. The currency advanced to 103.35 yen, the strongest since Nov. 9, before trading at 103.12 yen from 102.97 yen. It has climbed 13.3 percent versus the yen this quarter.

New Zealand's dollar strengthened to 75.65 U.S. cents from 75.56 cents yesterday. It has fallen 4.2 percent this quarter and 2.2 percent this year. The currency, which has gained 3.7 percent this quarter, was unchanged at 81.60 yen.

Rate Futures

Futures contracts on the Chicago Board of Trade show a 35 percent chance the Fed will increase its target rate for overnight lending between banks by at least a quarter-point at its August meeting, down from 47 percent odds a week ago. There is a 10 percent chance the Fed will raise borrowing costs at its two-day meeting ending today, the contracts show.

Benchmark interest rates are 7.25 percent in Australia and 8.25 percent in New Zealand, compared with 2 percent in the U.S. and 0.5 percent in Japan.

``The scaling back of Fed tightening expectations saw U.S. yields fall, increasing the interest-rate support for the New Zealand dollar,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. Still, ``worries about the sharp slowdown in the New Zealand economy should continue to temper gains.''

New Zealand's economy may have contracted 0.3 percent in the first three months of the year, according to the median forecast of 13 economists surveyed by Bloomberg News before the government reports the figure on June 27. Seven said the economy may also shrink in the second quarter, pushing New Zealand into its first recession since 1998.

There's a 28 percent chance the Reserve Bank of New Zealand will cut its 8.25 percent benchmark rate by a quarter-percentage point at next month's meeting, according to a Credit Suisse Group index based on trading in interest-rate swaps.

Bonds Gain

Australian government bonds gained, pushing the yield of the 10-year security down 7 basis points to 6.49 percent, according to data compiled by Bloomberg. The price of the 5.25 percent note due March 2019 rose 0.525, or A$5.25 per A$1,000 face amount, to 90.561.

New Zealand's government bonds rose with the yield on the benchmark 10-year note dropping 2 basis points to 6.42 percent. A basis point is 0.01 percentage point.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net