New Zealand Dollar Strengthens on Prospect of U.S. Rate Cut

New Zealand's dollar rose to near the highest in a month as traders increased bets the Federal Reserve will cut its benchmark interest rate this month, adding to the allure of the South Pacific nation's bonds and bills., Bloomberg 1/14/2008 7:52:26 AM

The currency, known as the kiwi, extended last week's biggest gain since October on the prospect New Zealand's 4 percentage point rate premium will widen. Traders have fully priced in the odds of a half-percentage point reduction in the Fed's rate.

The New Zealand dollar gained 0.4 percent to 78.61 U.S. cents as of 4 p.m. in Wellington compared with 78.28 cents late in New York on Jan. 11. It jumped 2.1 percent last week, the most since a 2.5 percent rise in the last week of October.

The currency advanced 0.4 percent to 85.31 yen from 85.18 yen late last week, when it rose 2.4 percent, the biggest gain since the end of November.

The New Zealand dollar strengthened 8.2 percent against the dollar since Sept. 18, when the Fed reduced rates for the first time in 2007. Futures traded on the Chicago Board of Trade put the chance of a Fed cut to 3.75 percent at 100 percent, from 66 percent a week ago.

New Zealand's record 8.25 percent benchmark rate is the highest after Iceland's among Aaa-rated economies. It makes the currency a favorite for the so-called carry trade, where funds borrowed in countries with lower interest rates are invested in places, such as New Zealand, where the returns are higher.

New Zealand Dollar Strengthens on Prospect of U.S. Rate Cut