Thursday, August 31, 2006

N.Z. Dollar Heads for Biggest Weekly Gain in Two Years on Rates

By Tracy Withers

Sept. 1 (Bloomberg) -- New Zealand's dollar is headed for its biggest weekly gain in more than two years as investors are attracted to the nation's high yields amid speculation the central bank won't cut interest rates until at least March.

The yield on New Zealand three-year government bonds has widened to 1.76 percentage points more than the equivalent U.S. maturity, from as little as 0.9 points in April, buoying demand for the currency. New Zealand's dollar has gained 3 percent this week, its biggest advance since May 2004.

``Recent New Zealand dollar moves are all about yield,'' said Sean Comber, market economist at ANZ National Bank Ltd. in Wellington. ``It doesn't appear too difficult for the currency to extend'' its gains, he said.

The currency rose to 65.58 U.S. cents at 9:55 a.m. in Wellington from 65.22 cents in late Asian trading yesterday. It bought 63.65 cents in late New York trading on Aug. 25.

The New Zealand dollar's 7.8 percent gain so far this quarter is the best-performance of a major currency. The local dollar, which is near a six-month high, may rise as high as 65.95 cents, Comber said.

Taking advantage of the nation's high yields, Rentenbank, the state-owned German lender to the rural industry, sold NZ$85 million ($56 million) of two-year Uridashi bonds to Japanese individual investors yesterday.

Reserve Bank Governor Alan Bollard on July 27 said it will be some time before he can consider lowering the official cash rate from 7.25 percent because of inflation. Consumer prices rose 4 percent in the three months to June 30, the fastest in five years.

High Rates to Endure

All 12 economists Bloomberg surveyed Aug. 18 expect rates to remain unchanged for the rest of the year. Four expect Bollard to start lowering rates in March. Six expect a cut in the second quarter and two in the third.

Annual inflation will be 3.5 percent in a year's time, according to a survey of 521 companies by National Bank of New Zealand released Aug. 30 Bollard last month said he won't cut rates until he is confident inflation will return to the 1 percent-to-3 percent range he targets.

New Zealand's benchmark interest rate is 2 percentage points more than the Federal Reserve's target rate for overnight bank loans.

Interest-rate futures show traders have cut expectations the Fed will raise borrowing costs again this year. The odds of another quarter-percentage point increase by Dec. 31 are about 12 percent, from 28 percent yesterday and 100 percent last month.

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