Australian Dollar Rises

The Australian dollar rose after retail sales climbed at the fastest pace in six months in May, prompting traders to add to bets the Reserve Bank of Australia will raise interest rates. New Zealand's dollar fell.

Australia's dollar advanced to near a 25-year high on prospects consumers are weathering 12-year-high borrowing costs. Tax cuts introduced yesterday that lift average incomes A$20 ($19) a week may boost spending in coming months. New Zealand's dollar fell for a second day after Reserve Bank of New Zealand Governor Alan Bollard signaled the economic expansion is slowing.

The Australian dollar rose to 96.03 U.S. cents at 3:30 p.m. in Sydney, from 95.47 cents before the retail sales report was released and 95.73 cents late in Asia yesterday. It reached a 25- year high of 96.68 cents on June 30. The currency climbed 0.7 percent to 101.63 yen, the largest gain since May 16.

Australian sales rose 0.7 percent from April, when they fell a revised 0.1 percent, compared with the 0.2 percent drop initially reported, the Bureau of Statistics said in Sydney today. The median estimate of 24 economists surveyed by Bloomberg News was for a 0.1 percent increase.

Australia's dollar was the best performer among the 16 most- active currencies, extending a 5 percent gain in the second quarter. The difference in yield between two-year Australian and U.S. government bonds widened to 4.29 percentage points, the most since June 11, buoying the Australian currency.

Benchmark interest rates are 7.25 percent in Australia and 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 popular 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 borrowing and lending rate. The risk is currency market moves erase those profits.

Gains in the Australian dollar may be limited as the bureau also said the number of permits granted to build or renovate houses and apartments dropped 6.5 percent in May from April, when they rose a revised 5.4 percent. The median estimate in a Bloomberg survey was for a 3.4 percent decline.

Australian Dollar Rises, Bloomberg
7/2/2008 6:56:43 AM