Nov. 2 (Bloomberg) -- The yen and the dollar fell against their higher-yielding counterparts after Australia’s central bank unexpectedly raised interest rates, fueling optimism that the global economic recovery is being sustained. Australia’s dollar advanced to parity with its U.S. peer as Reserve Bank Governor Glenn Stevens said the economy has “relatively modest amounts of spare capacity.” The U.S. currency fell against the euro on speculation the Federal Reserve will this week increase purchases of government debt, debasing the dollar. The pound fell after a report showed U.K. construction grew at the slowest pace in eight months. “We’re seeing a nice pick-up in global activity and that means you will see strong or sustained demand for commodity and high-yielding currencies,” said Kenneth Broux, a senior market economist at Lloyds Banking Group Plc in London. “You can’t play down the RBA rate hike. The statement was open ended, which means it does not close the door to further hikes.” The yen dropped to 112.87 per euro as of 6:56 a.m. in New York, from 111.85 yesterday. It declined 1.5 percent to 80.64 per Australian dollar and lost 0.7 percent to 11.6150 per South African rand. The yen was at 80.80 per dollar from 80.51. The dollar fell to $1.3964 per euro from $1.3893 yesterday, when it slid to $1.4011, the weakest since Oct. 25. Japan’s currency snapped a two-day gain versus the euro as Asian stocks advanced after the Reserve Bank of Australia’s announcement. The MSCI Asia Pacific Index of regional shares gained 0.3 percent. Futures on the Standard & Poor’s 500 Index advanced by 0.4 percent. Commodity Producers China’s purchasing managers’ index released yesterday rose to 54.7 in October from 53.8 in September. Statistics New Zealand said today its labor-cost index showed wages for non- governmental workers advanced 0.6 percent in the third quarter, accelerating for a second consecutive three-month period. The Australian dollar climbed for a fourth day versus the greenback as Stevens raised the overnight cash rate target by a quarter percentage point to 4.75 percent, the first increase in six months. The decision, predicted by seven of 24 economists surveyed by Bloomberg News, was the second straight in which Stevens defied the majority of economists’ forecasts. “In all likelihood the RBA will be tightening again in the coming months and this underpins the outlook” for the Aussie, Jane Foley, a senior foreign-exchange strategist at Rabobank International in London, wrote in a client note. Australia’s currency may move toward $1.0130 if it can “muster the energy to push beyond the $1.005 level today,” she said in the note. Australia’s dollar climbed 1.1 percent to 99.83 U.S. cents. It rose as high as $1.0013, surpassing parity for the first time since Oct. 15. Pound Drops The pound fell 0.9 percent to 87.39 pence per euro and was 0.3 percent weaker at $1.5981. A gauge based on a survey of purchasing managers at building companies fell to 51.6 in October from 53.8 a month earlier, Markit Economics Ltd. and the Chartered Institute of Purchasing and Supply said in an e-mailed statement. The median estimate of 10 economists in a Bloomberg News survey was for a reading of 53. A measure above 50 indicates expansion. The U.S. currency fell for the third day in four against the euro on speculation Fed policy makers will announce a new asset-purchase plan, known as quantitative easing, after their Nov. 2-3 meeting to bolster the recovery. Easing Outlook Fifty-three of 56 economists surveyed last week said the Fed will restart a purchase program. Twenty-nine estimated it will pledge to buy $500 billion or more, while another seven forecast $50 billion to $100 billion in monthly purchases without a specified total. “We could well find ourselves in a situation where the Fed goes down the QE route,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. “We’ll see further dollar weakness, particularly if the Fed puts into place a program that meets or exceeds market expectations.” The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro, fell 0.5 percent to 76.922. The dollar’s losses against the euro may reverse as traders shift their focus to European countries’ budget deficits after the Fed meeting, according to Commerzbank AG. While investors “question the long-term sustainability of the peripheral countries’ budgets,” such “fundamental concepts as this are hardly going to be relevant while the issue of quantitative easing II is still dominating the markets,” a team of analysts led by Ulrich Leuchtmann in Frankfurt wrote in a research note today. “But afterwards these issues might begin to put pressure” on the euro, they wrote. The euro may decline to $1.35 by the end of next month, they said. --With assistance from Monami Yui in Tokyo, Candice Zachariahs in Sydney, Andrea Wong in Hong Kong and Svenja O’Donnell in London. Editors: Keith Campbell, Mark McCord. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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