By Garfield Reynolds Dec. 16 (Bloomberg) -- The Australian and New Zealand dollars rose for a second day on speculation the Federal Reserve will cut interest rates and pour extra funds into the financial system, reducing demand for the U.S. currency as a safe haven. The greenback fell against all of the 16 most-active currencies in the past week as policy makers flood the world with an extra $8.5 trillion to spur bank lending as a global recession takes hold. The Australian dollar extended gains as the country’s central bank reduced its inflation forecast and signaled it may slow the 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 advanced to 66.97 U.S. cents at 5:01 p.m. in Sydney from 66.46 cents late yesterday in Asia. The currency rose 0.2 percent to 60.52 yen. The Australian dollar may rise as high as 67.50 cents today, Rennie said. New Zealand’s dollar climbed to 55.77 U.S. cents from 55.33 yesterday. It bought 50.42 yen from 50.27. The Australian dollar has weakened 24 percent against the dollar and 38 percent versus the yen this year as the slide in commodities and a global recession prompted investors to cut holdings of the nation’s assets. New Zealand’s currency has fallen 28 percent and 42 percent against the dollar and yen, respectively. Fed Rates Futures on the Chicago Board of Trade showed a 68 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. The Reserve Bank of Australia trimmed its forecast for inflation in the 12 months through June 2009 to 2.5 percent from a November prediction of 3 percent, according to minutes of its Dec. 2 policy meeting released today. That may allow central bank Governor Glenn Stevens to pause after reducing 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. ‘Big Rate Cuts’ “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.” The central bank’s one percentage point rate cut this month puts monetary policy at an “expansionary setting” to stoke business and consumer confidence, policy makers said in the minutes published today. 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, Australia’s biggest trading partner, Westpac’s Rennie said. Mineral Shipments 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. Earnings from commodity exports may be A$192 billion ($129 billion) in the year ending June 30, 2009, less than the A$214 billion forecast in September. “China’s continuing demand for minerals and metals commodities is key to the speed of turnaround in commodities markets,” the bureau said in a report on its Web site. Australian government bonds gained. The yield on the benchmark 10-year note fell 17 basis points, or 0.17 percentage point, to 4.25 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 advanced 1.416, or A$14.16 per A$1,000 face amount, to 108.24. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, rose to 4.75 percent from 4.72 percent. To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net.

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