Australian, N.Z. Dollars Advance on Outlook for Fed Rate Cut

By Candice Zachariahs

Dec. 15 (Bloomberg) -- The Australian and New Zealand dollars rose on speculation the Federal Reserve will cut interest rates at least half a percentage point tomorrow, increasing demand for higher-yielding assets.

The two currencies also extended last week’s gain as regional stocks climbed on optimism U.S. automakers will be rescued by the Bush administration, preventing bankruptcies that may deepen the global recession. Fed Chairman Ben S. Bernanke will lower the benchmark rate for the seventh time this year to 0.5 percent, according to a Bloomberg News survey of economists.

“Interest rates in the U.S. continue to fall and are weighing on the U.S. dollar,” said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group in Sydney. “If the U.S. weakness continues, the Aussie could reach 68 cents over the next few days,” he said referring to the currency by its nickname.

Australia’s currency advanced 0.4 percent to 66.73 U.S. cents as of 12:43 p.m. in Sydney, from 66.44 cents late last week in New York. The currency rose 0.3 percent to 60.67 yen. New Zealand’s dollar gained 0.6 percent to 54.98 U.S. cents and 0.1 percent to 49.96 yen.

The Fed will “likely say that interest rates will remain low for a long time, which has the potential to trigger a fall in the U.S. dollar,” John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney, wrote in a note to clients today. The Australian dollar “looks solid” between 64.90 and 65 cents, he said.

Rate Advantage

Benchmark rates are 4.25 percent in Australia and 5 percent in New Zealand, attracting investors to the South Pacific nations’ assets. The risk in such trades is that currency-market moves will erase profits.

The Reserve Bank of Australia will tomorrow release minutes of its Dec. 2 board meeting, when it lowered its benchmark rate a greater-than-expected one percentage point and policy makers signaled they may slow the pace of the country’s most aggressive cycle of cuts since 1991.

Gains in the currencies may be limited after the Australian Bureau of Agricultural and Resource Economics said today commodity exports may be 10 percent less than previously forecast as growth slows due to the global financial crisis.

Commodity export earnings may be A$192 billion ($128 billion) for the year ending June 30, the bureau said, cutting a September projection of A$214 billion. Prices for steelmaking materials iron ore and coking coal, Australia’s top two export earners, are expected to fall in the year starting April 2009, the bureau said.

Stock Gains

The currencies also strengthened as regional equities advanced on optimism President George W. Bush may tap funds set aside for banks to provide short-term aid to the auto industry after a $14 billion bailout package was rejected by the Senate.

Bush said today he is “not quite ready” to announce his decision on a rescue plan. The president, traveling on Air Force One from Iraq to Afghanistan, told reporters “it won’t be a long process” because of the “fragility” of the industry

The Australian and New Zealand currencies advanced against the yen after Bank of Japan said an index of confidence among large manufacturers fell the most in 34 years. The Tankan index dropped to minus 24 from minus 3, the quarterly survey showed today. A negative number means pessimists outnumber optimists.

Australian government bonds declined. The yield on the benchmark 10-year note rose 18 basis points, or 0.18 percentage point, to 4.48 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 slid 1.535, or A$15.35 per A$1,000 face amount, at 106.262.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 4.71 percent.

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