New Zealand Dollar Rises as AIG Prospects Bolster U.S. Stocks

By Tracy Withers

Sept. 17 (Bloomberg) -- The New Zealand dollar surged, reversing earlier losses, as speculation U.S. authorities may bail out American International Group Inc. buoyed stock markets and renewed demand for higher-yielding currencies.

The Federal Reserve is considering taking over American International Group Inc. under a conservatorship as one option to address the insurer's crisis, according to two people briefed on the discussions. The world's biggest insurer is seeking capital to stave off a collapse. The news helped the Standard & Poor's 500 index rise 1.8 percent.

``The New Zealand dollar rebounded off its lows in line with the recovery in U.S. equity markets amid hopes that government authorities will take action to prevent a systemic failure of the banking system,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington.

New Zealand's dollar rose 1.3 percent to 66.06 U.S. cents at 9 a.m. in Wellington from 65.21 cents in late Asian trading yesterday. Earlier, it fell as low as 65.08 cents. The currency surged 2.7 percent to 69.76 yen.

The currency yesterday fell to the lowest in more than four years against the yen as investors exited so-called carry trades amid nervousness about financial markets.

In carry trades, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is that currency market moves can erase those profits.

New Zealand's benchmark interest rate is 7.5 percent compared with 0.5 percent in Japan.

The New Zealand dollar, which has dropped 13 percent against the U.S. currency the past three months, may gain further if Asian stocks rise, Hampton said. It could reach 66.5 cents today, she said.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net