N.Z. Dollar Rises to 7-Week High as High Rates Lure Investors

By Emma O'Brien

Oct. 1 (Bloomberg) -- The New Zealand dollar rose to the highest in more than seven weeks on speculation the central bank will keep its benchmark rate at a record 8.25 percent this year.

The currency rose as high as 76.08 U.S. cents, after surging 6.2 percent in September, its biggest monthly gain since May 2002. Figures last week showed the economy grew faster than forecast in the second quarter, stoking expectations interest rates will stay high. The official cash rate is 3.5 percentage points more than the Federal Reserve's target.

``The yield differential is still in favor of the kiwi,'' said Tony Allen, currency trader at ANZ National Bank Ltd. in Wellington, referring to the currency by its nickname. ``How can you sell it when growth is still as strong as it is and the U.S. dollar down where it is?''

New Zealand's dollar bought 76.02 U.S. cents at 9:22 a.m. in Wellington, from 75.79 cents in late New York trading Sept. 28. The currency last rose above 76 cents on Aug. 11, when it strengthened to 77.03 cents.

It bought 87.02 yen versus 87.01 on Sept. 28 in New York.

Reserve Bank Governor Alan Bollard has raised rates four times this year in a bid to contain consumer spending and housing demand, which he says are buoying inflation. At his last monetary policy review Sept. 13 Bollard left the rate unchanged and said inflation remains at the top of the bank's 1 percent to 3 percent target band.

New Zealand's benchmark interest rates is the highest after Iceland's among Aaa rated countries.

Economic Growth

The economy grew 0.7 percent in the second quarter, beating a 0.5 percent median estimate of 11 economists in a Bloomberg survey.

The New Zealand dollar gained 4 percent Sept. 19, the day after the Federal Reserve cut U.S. rates by a half-percentage point. Speculation the Fed may reduce rates again when it meets Oct. 31 sparked the dollar's fall to a record low against the euro last week.

Futures contracts show 84 percent odds that the Fed will cut its target rate to 4.5 percent this month, compared with a 14 percent likelihood a month ago.

New Zealand's currency may strengthen against the yen today with Japanese investors attracted to so-called carry trades on the currency, Allen said. Carry trades, where cheaply borrowed yen is invested in countries such as New Zealand that offer higher yields, have boosted the New Zealand dollar 13 percent versus the yen in the past 12 months.

Bonds Unchanged

``The Japanese are still trying to get their money offshore and the high yielders like New Zealand are looking good,'' Allen said. ``The U.S. dollar is under some real pressure, why would you buy it?''

New Zealand government bonds were little unchanged. The yield on the country's two-year note held steady at 6.93 percent. The yield on the benchmark 10-year bond added 1 basis point to 6.26 percent. A basis point is 0.01 percentage points and bond yields move inversely to their prices.

Last Updated: September 30, 2007 16:24 EDT