By Garfield Reynolds Dec. 16 (Bloomberg) -- The Australian and New Zealand dollars advanced a second day amid expectations the Federal Reserve will cut interest rates and pour currency into the system, reducing demand for the U.S. dollar as a safe haven. The greenback weakened against most major currencies in the past week as policy makers flood the world with an extra $8.5 trillion to bail out the financial system and revive the economy. The Australian dollar extended gains as the country’s central bank trimmed its inflation forecast, indicating the bank may slow their fastest round of rate cuts since 1991. “The U.S. dollar may weaken for the rest of this year as the Fed continues to cut rates and moves to a purer form of quantitative easing,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest bank. “The Australian dollar may be held back by concerns that commodity prices will fall further next year as the global economy slumps.” Australia’s dollar traded at 66.97 U.S. cents as of 12:28 p.m. in Sydney from 66.46 cents late yesterday in Asia. The currency rose 0.4 percent to 60.62 yen. The Australian dollar may trade between 66.25 U.S. cents and 67.50 cents, Rennie said. New Zealand’s dollar traded at 55.59 U.S. cents from 55.33 yesterday. It bought 50.30 yen from 50.27. Futures on the Chicago Board of Trade showed a 70 percent chance the Fed will trim its 1 percent target rate for overnight lending between banks at its meeting today by 0.75 percentage point to an all-time low, compared with zero odds a month ago. That would make the Fed target less than Japan’s 0.3 percent benchmark, the lowest in the industrialized world. RBA Minutes The Reserve Bank of Australia today trimmed its forecast for inflation in the 12 months through June 2009 to 2.5 percent from a November prediction of 3 percent. That may let central bank Governor Glenn Stevens slow down after slashing the overnight cash rate target by three percentage points since September to 4.25 percent, matching the lowest since the RBA started setting a target in 1990. Policy makers aim to keep inflation between 2 percent and 3 percent. “They are saying don’t expect further big rate cuts like we have had in the past couple of months,” said Guthrie Williamson, portfolio manager in Sydney at Principal Global Investors, which manages $228 billion in assets globally. “If inflation is in their target range and monetary policy at a stimulatory level, then they are indicating that they don’t necessarily have to do much more.” Chinese Demand The central bank’s one percentage point interest-rate cut this month puts monetary policy at an “expansionary setting” to stoke business and consumer confidence, policy makers said in minutes published today from the Dec. 2 meeting. Inflation is likely to slow “more quickly in the short term as a result of the recent falls in petrol prices,” the RBA said. Australia’s economy grew last quarter at the weakest pace in eight years as household spending stalled. The Australian dollar may fall toward the 5 1/2-year low of 60.1 U.S. cents reached in October as commodity prices come under pressure from a slowdown in China, its biggest trading partner, Westpac’s Rennie said. Asia accounted for 71 percent of Australia’s minerals exports and 66 percent of its energy shipments in 2007-2008, the Australian Bureau of Agricultural and Resource Economics said yesterday. The nation’s earnings from commodity exports may be A$192 billion ($128 billion) in the year ending June 30, 2009, rather than A$214 billion as forecast in September, it said. Bonds Rally “China’s continuing demand for minerals and metals commodities is key to the speed of turnaround in commodities markets,” it said in a report on its Web site. Australian government bonds rose. The yield on the benchmark 10-year note fell 14 basis points, or 0.14 percentage point, to 4.28 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 advanced 1.23, or A$12.30 per A$1,000 face amount, to 108.05. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was 4.74 percent from 4.72 percent. To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net

Source