Australia, N.Z. Dollars Gain on Reports of U.S. Rescue Deal

By Candice Zachariahs

Sept. 25 (Bloomberg) -- The Australian and New Zealand dollars rose as reports the U.S. government is nearing a deal to implement Treasury's plan to rescue financial institutions bolstered demand for higher-yielding assets.

The currencies rose as House Financial Services Committee Chairman Barney Frank said House and Senate Democrats reached a deal on the $700 billion plan. The Australian dollar also strengthened after the Reserve Bank of Australia said the nation's financial system is weathering the global credit turmoil better than many others.

``We've had some headlines out about the likelihood of the U.S. bailout getting passed,'' said John Horner, a currency strategist at Deutsche Bank AG in Sydney. ``That's seen risk sentiment improve.''

The Australian dollar rose 0.1 percent to 83.86 U.S. cents at 4:30 p.m. in Sydney from 83.79 cents in late Asian trading yesterday. It declined 0.3 percent to 88.64 yen.

New Zealand's currency rose 0.3 percent to 68.60 U.S. cents from 68.42 cents yesterday. It bought 72.52 yen from 72.64.

Benchmark interest rates are 7 percent in Australia and 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 2 percent in the U.S., luring investors to the South Pacific nations' assets. The currencies are favorites with investors using carry trades to seek higher returns using funds received in a country with low borrowing costs. The risk is that exchange-rate fluctuations erase profits.

Bailout Accord

The Australian and New Zealand currencies rose after Frank told reporters in Washington that he and Senate Banking Committee Chairman Christopher Dodd will hold a meeting tomorrow to negotiate with Republicans.

The U.S. currency weakened as President George W. Bush warned the U.S. may face a ``painful'' recession and traders bet on a Federal Reserve interest-rate cut next month.

Australia's financial system was in a ``positive position,'' the Reserve Bank said in its half-yearly Financial Stability Review published today in Sydney.

While ``strong and profitable,'' the nation's five largest banks have almost tripled provisions for bad debts to A$3.1 billion ($2.6 billion), the report said.

The New Zealand dollar's advance may slow before a report that will probably show the economy slumped into its first recession in 10 years in the second quarter, adding pressure on the central bank to cut interest rates to a three-year low next month.

Growth Report

Gross domestic product shrank 0.5 percent in the three months ended June 30 after contracting 0.3 percent in the first quarter, according to the median estimate of 13 economists surveyed by Bloomberg. The GDP report is released tomorrow at 10:45 a.m. in Wellington.

``We're a little bit on neutral, waiting for the GDP figure coming out tomorrow, said Alex Sinton, a senior currency dealer at ANZ National Bank Ltd. in Auckland. ``While that's a lag number and it's going to be negative, it's a question of how negative and how the market reacts.'' He expects the kiwi, as the currency is called, to trade between 67.80 and 68.80 cents.

Australian government bonds declined. The yield on the 10- year note rose 2 basis points, or 0.02 percentage point, to 5.723 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 fell 0.129, or A$1.29 per A$1,000 face amount, to 96.313.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, rose to 6.995 percent today from 6.990 percent yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net