New Zealand Dollar Rises Most in Two Weeks as U.S. Stocks Drop

By Candice Zachariahs

July 10 (Bloomberg) -- The New Zealand dollar rose the most in almost two weeks against the U.S. currency as a drop in U.S. equities increased the allure of the nation's higher-yielding assets.

The kiwi, as the local currency is called, gained for a second day as concern over the financial health of mortgage finance companies Fannie Mae and Freddie Mac led to a 2.3 percent drop in the Standard & Poor's 500 Index, capping the benchmark index's 20 percent drop since October.

``New Zealand still has fairly wide rate spreads,'' said David Watt, a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada's largest bank. ``Some people are nibbling at the margins.''

The currency rose 0.5 percent to 75.77 U.S. cents at 8:43 a.m. in Wellington, from 75.41 U.S. cents in late Asian trading yesterday. That's the highest level since July 3. The kiwi bought 80.91 yen, compared with 80.99 yen yesterday.

The benchmark interest rate in New Zealand is 8.25 percent compared with 0.5 percent in Japan and 2 percent in the U.S. making it a favorite for carry trades. In the transactions, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the borrowing and lending rates. The risk is currency market moves erase those profits.

Reserve Bank Governor Alan Bollard said on June 5 it is ``likely'' he will reduce interest rates this year because weak economic growth is slowing inflation. Three of 13 economists surveyed by Bloomberg News expect a reduction to 8 percent at the next meeting on July 24.

New Zealand's dollar has declined 5 percent in the past three months, the worst performer among the 16 most-traded currencies against the U.S. dollar.

To contact the reporter on this story: Candice Zachariahs in New York at czachariahs1@bloomberg.net