New Zealand Dollar Gains on Prospect of U.S. Interest Rate Cut

By Emma O'Brien


Jan. 9 (Bloomberg) -- New Zealand's dollar rose on speculation the Federal Reserve will be forced to cut interest rates, boosting the appeal of the South Pacific nation's higher- yielding assets.

The country's record 8.25 percent rate is 4 percentage points higher than the U.S. target, luring investors to its currency, bonds and bills. Traders increased bets the Fed Funds rate will be reduced this month for the fourth time since Sept. 18 after a report showed sales of existing homes in the U.S. dropped more than economists' forecast.

``A cut is all but certain,'' said Michael Gordon, currency strategist at Westpac Banking Corp. in Wellington. ``It has given impetus for high-yielding currencies like the kiwi to go higher,'' he said, referring to the New Zealand dollar by its nickname.

The currency bought as much as 77.33 U.S. cents today, the highest since Jan. 4, before trading at 77.24 cents as at 8:37 a.m. in Wellington, from 77.05 cents in late Asian trading yesterday. It may rise to around 77.80 today, Gordon said.

The New Zealand dollar climbed to 84.63 yen, from 84.46 late yesterday.

The local currency has gained 9.7 percent since the Fed cut its benchmark rate for the first time last year, in a bid to rejuvenate an economy subdued by the worst housing slump in at least 16 years.

Carry Trade

The gap with the U.S. rate and a 7.75 percentage point advantage on Japan's target has made New Zealand's dollar a favorite for the so-called carry trade. In carry trades investors borrow funds in countries with lower interest rates and invest the money in places that offer higher returns. New Zealand's official cash rate is the highest after Iceland's among Aaa rated economies.

Odds the Fed will reduce its 4.25 percent rate by a half- percentage point to 3.75 percent when it meets Jan. 30 are at 66 percent, from 24 percent a week ago. The possibility of it being left unchanged is at zero percent, according to futures traded on the Chicago Board of Trade.

The U.S. National Association of Realtors' index of pending home sales decreased 2.6 percent in November to 87.6, the group said yesterday. Economists surveyed by Bloomberg News forecast a 0.7 percent fall in the index, which gained 3.7 percent in October.

New Zealand government bonds were little changed. The yield on the benchmark 10-year bond held steady at 6.26 percent, while the two-year note yielded 7.23 percent, also unchanged. Bond yields move inversely to their prices and a basis point equals 0.01 percentage point.