Australia, New Zealand Dollars Gain on Outlook for U.S. Rates

By Ron Harui and Candice Zachariahs

July 11 (Bloomberg) -- The Australian and New Zealand dollars gained speculation credit-market losses in the U.S. will deepen, undermining the case for the Federal Reserve to raise interest rates.

Australia's dollar traded near a 25-year high and New Zealand's dollar headed for a third day of gains after Treasury Secretary Henry Paulson told lawmakers that markets will take ``additional time'' to stabilize Fannie Mae and Freddie Mac, the largest U.S. providers of home-mortgage financing. Prospects the two nations will retain their interest-rate advantage over the U.S. spurred investors to put funds into higher-yielding assets.

``A Fed rate hike may no longer be on the cards as the U.S. financial market turmoil hasn't ended yet,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``High-yielding currencies such as the Australian and New Zealand dollars are likely to appeal to investors.''

Australia's dollar traded at 96.04 U.S. cents at 4:31 p.m. in Sydney from 96.03 cents late in Asia yesterday. It reached 96.68 cents on June 30, the strongest since February 1983. It was poised for its first weekly loss in four. The currency bought 103.03 yen from 102.94 yen yesterday and 102.89 yen late in New York on July 4.

New Zealand's dollar advanced to 75.80 U.S. cents from 75.72 cents late in Asia yesterday. The currency traded at 81.32 yen from 81.18 yen yesterday and 81.07 yen on July 4.

Near 25-Year High

The Australian dollar gained for a second day after former St. Louis Fed President William Poole said there is a growing chance the government will need to bail out Fannie Mae and Freddie Mac, contributing to respective slides of 14 percent and 22 percent in the stocks. Paulson said the regulator that oversees the two mortgage-financing companies told him they have enough capital.

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, making them popular destinations for international investors seeking higher returns.

Futures on the Chicago Board of Trade show an 86 percent probability that the Fed will keep borrowing costs unchanged at 2 percent at the next meeting on Aug. 5, compared with 34 percent odds a month ago.

The Australian dollar, known as the Aussie, also was supported after the UBS Bloomberg Constant Maturity Commodity Index gained 2 percent, the most in nine days. Gold, Australia's third-most valuable raw material export, climbed the most in a week as investors bought the metal as a safe haven.

`Pretty Positive Story'

``Oil, gold and aluminum prices moved sharply higher,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``That's a pretty positive story for the Aussie. It reflects U.S. dollar weakness as much as supply and demand dynamics.''

Exports of raw materials contribute about 17 percent to Australia's economy. The Australian government last month forecast sales of coal, iron ore and other commodity exports will generate a record A$212 billion ($204 billion) windfall for the economy in the year ending June 30, 2009, compared with A$151 billion estimated sales in 2008.

Gold futures for August delivery climbed $13.40, or 1.4 percent, to $942 an ounce yesterday on the Comex division of the New York Mercantile Exchange, the biggest percentage gain for a most-active contract since July 1. Gold is Australia's third- biggest export earner.

Australian 10-year government bonds headed for a fourth weekly gain, with the yield falling to 6.37 percent from 6.42 percent on July 4. The price of the 5.25 percent bond maturing in March 2019 rose 0.405, or A$4.05 per A$1,000 face amount, to 91.430 from 91.025 a week earlier. Yields move inversely to prices.

New Zealand 10-year government debt was poised for a third weekly advance. The yield on the 10-year note dropped 22 basis points to 6.11 percent from 6.33 percent on July 4. A basis point is 0.01 percentage point.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.