Australian, N.Z. Dollars Rise to Two-Week Highs on Fed Rate Cut

By David McIntyre and Emma O'Brien

Jan. 31 (Bloomberg) -- The Australian and New Zealand dollars rose to the highest level in more than two weeks after the Federal Reserve cut its benchmark interest rate, attracting investors to the countries' higher yielding bonds.

Australia's rate advantage increased to a three-year high and New Zealand's to the widest in almost 15 years after the Fed cut rates by a half percentage point to 3 percent. Australia's dollar has gained 6.9 percent and New Zealand's jumped 11 percent since Sept. 18, when the Fed cut borrowing costs for the first time in four years in a bid to reignite growth.

``The Australian and New Zealand dollars were boosted by the Fed rate cut,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. ``The U.S. dollar is weak right across the board with the Fed leaving the door wide open for further rate cuts.''

The Australian dollar, known as the Aussie, traded as high as 90.16 U.S. cents, the strongest since Jan. 15. It bought 89.13 cents at 10:06 a.m. in Sydney compared with 88.87 cents late in Asia yesterday.

The New Zealand dollar, dubbed the kiwi, climbed 0.5 percent to 78.26 U.S. cents and touched 79.16 cents, the strongest since Jan. 16.

Australia's dollar may reach 90.20 cents and New Zealand's may touch 79.35 cents today, which are resistance levels for the currencies, Trinh said. Resistance is where orders to sell a currency may be clustered.

Trade Deficit

New Zealand's dollar held gains after a government report showed the country's annual trade deficit narrowed to the smallest in two years as soaring prices for dairy products drove exports to a record. Rising overseas shipments, which make up 30 percent of the economy, may drive New Zealand's growth and generate demand for the currency.

The shortfall shrank to NZ$5.31 billion ($4.2 billion) in 2007 from NZ$5.69 billion in the 12 months through Nov. 30, Statistics New Zealand said in Wellington today. That beat the median estimate of NZ$5.5 billion in a Bloomberg News survey of nine economists.

The Fed said in a statement that downside risks to growth remain, suggesting policy makers may reduce rates again.

Australia's rate premium has increased to 3.75 percentage points, the highest since September 2004. New Zealand's rate advantage widened to 5.25 points, the most since February 1993.

The kiwi has gained the most among the 16 most-traded currencies since the Fed started cutting in September as investors were attracted to the country's 8.25 percent rate, one of the highest among developed economies. The Aussie has also benefited because of Australia's 11-year high 6.75 percent rate, which traders are betting will be raised next week.

Australian government bonds strengthened, pushing the yield on the 10-year note down 2 basis points to 6.04 percent. New Zealand's equivalent yield rose 2 basis points to 6.30 percent. A basis point equals 0.01 percentage point.