Australian, N.Z. Dollars Rise as ECB Rate-Rise Prospects Abate

By Ron Harui and Candice Zachariahs

July 4 (Bloomberg) -- The Australian and New Zealand dollars rose against the euro on speculation the European Central Bank won't add to yesterday's interest-rate increase, bolstering demand for higher-yielding currencies.

The currencies climbed the most in seven weeks as ECB President Jean-Claude Trichet said he has ``no bias'' on further moves after raising the region's main refinancing rate to 4.25 percent. The Australian dollar headed for a weekly gain as the difference in yield between two-year Australian and European bonds widened to the most in a week.

``The Aussie has always been an attractive haven for the high-yield play,'' said Paul Milton, chief foreign-exchange dealer at Societe Generale SA in Sydney. ``That's going to remain.''

The Australian dollar strengthened 1.1 percent, the most since May 16, to 0.6119 euro at 10:32 a.m. in Sydney from 0.6050 euro late in Asia yesterday. The currency traded at 96.04 U.S. cents from 96.15 cents. It rose to 102.51 yen from 102.21 yen.

The New Zealand dollar appreciated 0.8 percent, the largest gain since May 16, to 0.4816 euro from 0.4776 late in Asia yesterday. The currency fell to 75.56 U.S. cents from 75.93 cents. It bought 80.67 yen from 80.69 yen.

Australia's currency extended the past week's gain versus the euro to 0.6 percent after a government report on July 2 showed retail sales rose more than economists forecast, backing the case for the Reserve Bank of Australia to increase borrowing costs from a 12-year high.

Yield Advantage

Traders pared wagers the ECB will lift rates this year. The implied rate on the December Euribor interest-rate futures contract fell to 5.12 percent yesterday, from 5.28 percent on July 2. The yield advantage of two-year Australian bonds over similar-maturity European bonds was at 2.38 percentage points, near yesterday's high of 2.43 points, the most since June 26.

Benchmark interest rates of 7.25 percent in Australia and 8.25 percent in New Zealand compare with 4.25 percent in the euro area, 2 percent in the U.S. and 0.5 percent in Japan, making them popular among investors seeking higher returns.

The New Zealand dollar, known as the kiwi, may advance against the euro this week as the yield premium on three-year New Zealand government bonds over like-dated European debt remained at 1.83 percentage points, the highest in a week.

``You have this adjustment as the euro starts to sell off against the high yields,'' said Boris Schlossberg, a senior currency strategist, with currency trader DailyFX.com in New York. ``That's why the euro-kiwi dropped like a stone.''

Australian government bonds headed for a third weekly advance. The yield on the 10-year bond fell to 6.43 percent from 6.46 percent on June 27. The price of the 5.25 percent bond maturing in March 2019 rose to 90.971 from 90.737 a week earlier.

New Zealand government debt was poised for a second weekly gain. The yield on the 10-year note declined to 6.34 percent from 6.35 percent on June 27. The price of the 6 percent bond maturing in December 2017 climbed to 97.622 from 97.527 a week earlier. Bond 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.