Australian Dollar Near 25-Year High; N.Z. Dollar Little Changed

By Ron Harui and Candice Zachariahs

July 16 (Bloomberg) -- The Australian dollar traded near a 25-year high and the New Zealand dollar was close to its strongest in six weeks on speculation the nations will maintain their interest-rate advantage over the U.S.

Australia's currency may advance for a fifth day and New Zealand's may gain for a sixth as Federal Reserve Chairman Ben S. Bernanke said there are ``significant downside risks'' to U.S. economic growth, adding to signs the Fed may delay raising interest rates. The yield difference between 10-year Australian and U.S. bonds widened 4 basis points to 2.52 percentage points.

``There's little prospect of the Reserve Bank of Australia cutting rates any time soon so that's keeping yields attractive,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney.

Australia's currency rose to 98.49 U.S. cents, the highest since January 1983, before trading at 98.09 cents as of 11:27 a.m. in Sydney from 98.27 cents late in Asia yesterday. The currency, known as the Aussie, bought 102.82 yen from 102.88 yen.

The New Zealand dollar traded at 77.22 U.S. cents from 77.23 cents in Asia yesterday. It earlier reached 77.60 cents, the strongest since June 5. The currency, known as the kiwi, bought 80.95 yen from 80.85 yen.

The Aussie is the third-best performer among the 16 most- traded currencies in the past five days as futures traders reduced bets the Fed will increase borrowing costs this year, while Reserve Bank of Australia Governor Glenn Stevens may indicate in a speech at 1:05 p.m. in Sydney that he plans to keep rates at a 12-year high.

Fed's Bernanke

Benchmark interest rates of 7.25 percent in Australia and 8.25 percent in New Zealand compare with 2 percent in the U.S. and 0.5 percent in Japan, making them popular destinations for international investors seeking higher returns.

Bernanke told the Senate Banking Committee yesterday that economic growth and inflation risks are both increasing. His shift reflects renewed turmoil in markets that forced the Treasury and Fed to mount a rescue of mortgage companies Fannie Mae and Freddie Mac this week.

Fed funds futures on the Chicago Board of Trade show a 7 percent chance that the Fed will increase the 2 percent target lending rate at its Aug. 5 meeting, compared with 77 percent odds a month ago.

The New Zealand dollar may extend its 2 percent gain in the past five days as accelerating inflation prompted traders to pare bets the central bank will lower interest rates this month.

The consumer price index rose 1.6 percent in the second quarter, Statistics New Zealand said in Wellington yesterday. That's the fastest pace in 18 years. The median estimate of 12 economists surveyed by Bloomberg News was for 1.4 percent.

`July Less Likely'

``There are still expectations for rate cuts in New Zealand,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York. ``But the kind of numbers we got makes some of the most aggressive expectations of a rate cut in July less likely.''

Traders see a 48 percent chance the Reserve Bank of New Zealand will cut its benchmark rate by a quarter-percentage point at its next meeting on July 24, compared with 50 percent odds yesterday, according to a Credit Suisse Group index based on interest-rate swaps.

The yield on the 10-year Australian government bond rose 3 basis points to 6.34 percent, while the two-year yield fell 3 basis points to 6.58 percent. A basis point is equivalent to 0.01 percentage point.

New Zealand's government debt was little changed. The yield on the 10-year note was 6.03 percent, and the three-year bond yield was 6.09 percent. Yields move inversely to prices.

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