Australian, New Zealand Dollars Advance

The Australian and New Zealand dollars rose on speculation the extra yields offered by the nations' bonds attracted investors.

Australia's dollar traded near the highest level in 25 years as the yield premium investors earn for holding the country's two-year debt over similar-maturity U.S. Treasuries held near a six-week high. New Zealand's dollar climbed for an eighth day, its longest rally in 14 months, on optimism the highest benchmark interest rate of any nation with an Aaa credit rating will attract investors seeking greater returns.

The Australian dollar advanced to 96.12 U.S. cents as of 4:35 p.m. in Sydney from 95.89 cents late in Asia yesterday. It reached 96.54 cents on May 22, the highest since 1983. The currency climbed to 99.80 yen from 99.13 yen.

The New Zealand dollar rose to 79.21 U.S. cents, the strongest since May 7, before trading at 79.09 cents from 78.66 cents late in Asia yesterday. The currency strengthened to 82.12 yen from 81.32 yen.

The yield advantage of Australia's two-year bonds over like-dated Treasuries widened to 4.38 percentage points from 4.30 percentage points a week ago. The spread reached 4.40 percentage points on May 23, the most since April 11.

Australia's dollar may extend gains to equal the U.S. dollar in value should it close above so-called resistance at 96.50 cents, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London.

Benchmark interest rates are 7.25 percent in Australia and a record high 8.25 percent in New Zealand, compared with 2 percent in the U.S. and 0.5 percent in Japan, making the South Pacific currencies favorite targets for so-called carry trades.

In a carry trade, 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 currency market moves erase those profits.

New Zealand's dollar also rose to the highest in almost three weeks against the U.S. currency after an industry report showed the nation's business confidence improved for a second month in May, easing concern economic growth will slow.

Australian, New Zealand Dollars Advance, Bloomberg
5/27/2008 7:02:24 AM