Australian Dollar Rises to Almost Two-Week High

The Australian dollar rose to the highest level in almost weeks after a surge in U.S. stocks encouraged investors to increase carry trades., Bloomberg 1/28/2008 7:05:59 PM

The currency gained versus the yen as traders raised holdings of Australia's higher-yielding assets with money borrowed in Japan at lower borrowing costs. The Standard & Poor's 500 Index climbed 1.8 percent in New York yesterday as traders increased the odds the Federal Reserve will cut its benchmark lending rate by half a percentage point this week.

The Australian dollar strengthened to 88.85 U.S. cents at 8:55 a.m. in Sydney from 87.94 cents late in Asia yesterday. It reached 88.92 cents, the highest since Jan. 16, and may exceed 89 cents today, Kyriakopoulos said. Against the yen, the currency advanced to 95.0 from 93.6 yen yesterday.

Australia's dollar has gained 18 percent against the yen the past three years as investors were attracted to the nation's higher interest rate, currently at an 11-year high 6.75 percent.

In carry trades, investors borrow funds in countries with lower lending rates, such as Japan's 0.5 percent benchmark, using the cash to invest in nations that offer higher returns.

The strategy is considered risky because currency fluctuations can erase the profit earned on the difference in interest rates. The Australian dollar has declined 2.9 percent this year versus the yen as a slide in global stocks eroded investors' confidence in the trade.

Australian Dollar Rises to Almost Two-Week High