Australian Dollar Rises on Bets Rate Spread With U.S. to Widen

By David McIntyre

Oct. 5 (Bloomberg) -- The Australian dollar gained to within a cent of an 18-year high on speculation the nation's interest-rate advantage over the U.S. will widen after reports suggested growth in the world's largest economy will slow.

The local dollar is the second-best performer among the 16 most-actively traded currencies in the past month after the Federal Reserve cut its key borrowing cost, causing Australia's rate premium to widen to a two-year high. Futures contracts show traders increased bets on another U.S. rate cut after a report showed a drop in factory orders. The Reserve Bank of Australia will likely raise rates again, futures show.

``The Australian dollar has been lifted as the U.S. dollar lost support,'' said Joanne Masters, a currency strategist at Macquarie Bank Ltd. in Sydney. ``Weekly jobless claims drifted higher and factory orders were quite weak in the U.S.''

The Australian dollar rose to 88.82 U.S. cents at 8:55 a.m. in Sydney from 88.43 cents late in Asia yesterday, little changed from a week ago. It touched 89.50 cents on Oct. 2, the highest since 1989, and may reach 89 cents today, Masters said.

The currency gained to 103.53 yen from 103.17 yen yesterday and advanced from 101.93 yen a week ago.

The Australian dollar has jumped 6.9 percent the past month, beaten only by New Zealand's 8 percent gain, boosted by the Fed's decision on Sept. 18 to cut its target for overnight lending between banks by a half-percentage point to 4.75 percent. That took the rate spread with Australia's 6.5 percent benchmark to 1.75 percentage points, the most since October 2005.

Interest-rate futures show traders see a 72 percent chance the Fed will cut the overnight lending rate to 4.5 percent at their next meeting. The odds on an RBA rate increase on Nov. 7 is 40 percent, according to an index calculated by Credit Suisse Group based on trading in interest rate swaps.

Orders placed with U.S. factories fell a more-than-forecast 3.3 percent in August after a revised 3.4 percent increase in July, the Commerce Department reported yesterday in Washington.

The number of workers filing first-time claims for unemployment benefits rose more than forecast last week, the Labor Department reported.

Last Updated: October 4, 2007 19:07 EDT