By Yasuhiko Seki April 6 (Bloomberg) -- The Australian dollar rallied to its strongest in two weeks against the U.S. currency after the central bank raised benchmark borrowing costs for the fifth time in six meetings. The South Pacific nation’s currency also climbed as Pacific Investment Management Co., which runs the world’s biggest mutual fund, said it favors the currencies of Australia, China, Brazil and Canada. New Zealand’s dollar weakened after a report showed business confidence fell in the first quarter as slowing consumer demand curbed profits, investment and hiring. “The rate decision will increase Australia’s yield advantage over Japan,” said Takashi Kudo, general manager of market information at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. in Tokyo. “This acts as a catalyst for further advances in the Aussie.” Australia’s dollar was at 92.24 U.S. cents as of 4:11 p.m. in Sydney from 92.14 cents in New York, after touching 92.30 cents, the strongest since March 18. It had weakened as much as 0.5 percent before the rate decision. The currency fell to 86.78 yen from 86.95 yen. New Zealand’s dollar traded at 70.24 U.S. cents from 70.32 cents, and fell to 66.08 yen from 66.36 yen. The New Zealand Institute of Economic Research said today that a net 22 percent of companies surveyed last quarter expect the economy will improve over the next six months, down from 31 percent in the last three months of 2009. The net figure is calculated by subtracting the proportion of pessimists from optimists. ‘Further Step’ Governor Glenn Stevens increased the overnight cash rate target to 4.25 percent from 4 percent, the Reserve Bank of Australia said in a statement in Sydney today. The decision was predicted by 13 of 23 economists in a Bloomberg News survey. The Australian currency and bond yields rose after Stevens said the move was a “further step” in returning interest rates to average levels. “We’ve got a way to go before we see rates at normal levels,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “There’s a good case we’ll see much stronger than normal growth rates with much higher than normal inflation, and I think the RBA is aware of that.” Stevens said last week that Australian house prices are “getting too high,” signaling he wants to minimize the danger of a housing boom and bust in the aftermath of the U.S. example. ‘Closer to Average’ “Interest rates to most borrowers nonetheless have been somewhat lower than average,” the governor said in today’s statement. “With growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.” The benchmark interest rate is 2.5 percent in New Zealand, 0.1 percent in Japan and as low as zero in the U.S. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, rose 0.01 percentage point to 4.285 percent. Australian government bonds fell, with the yield on 10-year notes rising 0.1 percentage point to 5.85 percent, according to data compiled by Bloomberg. “We continue to expect a ‘desynchronized’ recovery, with less leveraged emerging economies likely to grow more robustly than the developed economies,” Pimco fund manager Paul McCulley, based at the company’s main office in Newport Beach, California, wrote on the company’s Web site. Greece Concerns The Australian dollar earlier fell as concern Greece will struggle to raise further funds damped demand for higher- yielding assets. Market News International reported, citing senior government officials in Athens it didn’t identify, that the Greek government wants to amend the accord for financial aid for the country reached at the European Union summit. Greek Prime Minister George Papandreou has received information from the International Monetary Fund about possible measures and reforms it would ask for in exchange for financial support, according to the report. “Renewed concerns over sovereign problems in Europe are weakening risk appetite,” said Keiji Matsumoto, a strategist at Nikko Cordial Securities Inc. in Tokyo. “Negative developments in the region will slow capital inflows into higher-yielding currencies and riskier assets, such as the Aussie.” To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

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