New Zealand's dollar rose above US$0.81 for the first time since it started trading freely in 1985 and Australia's currency gained to an 18-year high on bets the nations' central banks will raise interest rates.
Most economists predict the Reserve Bank of New Zealand will raise its key rate a quarter-point this week and traders have increased bets of higher Australian borrowing costs before a report today that may show inflation accelerated. New Zealand and Australia's dollars are the second and third-best performing major currencies this month as prospects of higher rates draw overseas investors to the nations' deposits.
"We continue to remain bullish on the Australian and New Zealand dollars," said Kathy Lien, chief currency strategist at DailyFX.com in New York. "The Reserve Bank of New Zealand is either going to raise rates or tell the market they will remain hawkish. Inflation is also an issue in Australia."
New Zealand's dollar was at US$80.88 at 2:31pm in Tokyo after touching US$81.10, the strongest since the currency started trading freely in March 1985. The Australian dollar traded at US$88.46 after reaching US$88.63, the highest since February 1989.
New Zealand's dollar will extend its rally to US$83, said John Key, the leader of the nation's opposition party and former European head of global foreign exchange at Merrill Lynch & Co, suggesting central bank efforts to halt the currency's gain will fail.
The Reserve Bank sold New Zealand dollars on June 11, saying its appreciation was "unjustified."
Australia's dollar fell and New Zealand's pared gains against the yen on speculation losses from US subprime mortgages will deepen and spur investors to pare riskier assets funded by borrowing cheaply in Japan.
Australia's currency was quoted at ?106.73 yen from ?107.01 yesterday while New Zealand's declined to ?97.59 from ?97.78 earlier, the highest since June 1986.
Japan's 0.5 percent overnight lending rate, the lowest of any major economy, has prompted investors to borrow yen to take advantage of New Zealand's 8 percent and Australia's 6.25 percent benchmark rates, as part of the so-called carry trade.
The currencies slid against the yen today on "nervousness" stemming from the US mortgage market, said Sharada Selvanathan, a currency strategist at BNP Paribas SA in Singapore. The decline was likely to be limited because Asian equity markets hadn't fallen, she said.
The New Zealand dollar has gained 30 percent versus the US currency over the past 12 months, the best-performing major currency, as Reserve Bank Governor Alan Bollard raised interest rates three times to a record 8 percent.
Twelve of 16 economists in a Bloomberg survey predict New Zealand's central bank will raise rates tomorrow, while the other four forecast they will remain on hold all year.
"The kiwi is surging," said Charles Wiggins, senior dealer at Custom House Global Foreign Exchange in Sydney, referring to the currency by its nickname. "Everyone is anticipating an interest rate hike by the RBNZ."
There is a 61 percent chance Bollard will raise rates this week, according to a Credit Suisse Group index based on the exchange of interest rate swaps. Those odds were 26 percent two weeks ago.
The odds of the Reserve Bank of Australia raising its overnight cash rate target from a six-year high of 6.25 percent on Aug. 8 are 36 percent, compared with 31 percent last Friday, a Credit Suisse index said.
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