By Chris Young
Feb. 19 (Bloomberg) -- The Australian dollar rose to the highest in three months after central bank Assistant Governor Malcolm Edey said he expects inflation to accelerate, adding to speculation interest rates will be raised as soon as next month.
Australia's dollar climbed for a fourth day after Edey said in a speech in Sydney that the consumer price index ``could spike close to 4 percent next quarter.'' Yields on two-year government notes climbed to the highest level in eight years as traders increased bets that the Reserve Bank of Australia will raise rates from an 11-year high of 7 percent on March 4.
``I don't see anything dovish in the speech for the Australian dollar,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. ``It supports our view that the RBA will raise rates in March and again in May.''
The Australian dollar rose to a three-month high of 91.58 U.S. cents before trading at 91.55 cents as of 10:11 a.m. in Sydney, from 91.12 cents in late Asian trading yesterday.
The yield on the two-year bond rose 3 basis points, or 0.03 percentage point, to 6.97 percent. The price of the 7.5 percent bond maturing in September 2009 fell 0.045, or A$0.45 per A$1,000 face amount, to 100.767.
Investors were lured to the currency as the yield advantage of two-year bonds over similar-dated U.S. Treasuries expanded to 5.05 percentage points, the widest gap since December 1990.
``The Australian economy to date has stayed robust and the main domestic challenges are those of strong demand, tight capacity and inflationary pressures,'' Edey said. The Reserve Bank says the underlying trend for inflation is ``around 3.5 percent.'' Policy makers aim to keep annual price gains between 2 percent and 3 percent on average.
Rate Outlook
Traders are assigning 86 percent odds the RBA will raise its target rate a quarter-percentage point to 7.25 percent at its March 4 meeting, a Credit Suisse Group index based on interest-rate swaps shows. It was 85 percent yesterday.
Australia's dollar is the best performing currency this month among the 16 most-traded.
The Reserve Bank, headed by Governor Glenn Stevens, lifted the benchmark interest rate to an 11-year high this month, and said it will probably need to raise borrowing costs further to cool the fastest inflation since 1991.
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