The Australian dollar was near its strongest level in two years as traders bet the central bank will increase benchmark interest rates next week, maintaining demand for the nation’s assets. The so-called Aussie, set for its biggest monthly gain since May 2009, is the best performer this quarter versus the greenback among its most-traded counterparts as the extra yield on Australia’s two-year notes over Treasuries widened to near the most since June 2008. Australia’s currency was near a five- month high against New Zealand’s on prospects the Reserve Bank of Australia will raise interest rates Oct. 5 while New Zealand policy makers may leave borrowing costs unchanged this year. “The Aussie has been underpinned by the interest-rate outlook and general weakness in the U.S. dollar because of the potential for quantitative easing from the Fed,” said Derek Mumford, a Sydney-based director at Rochford Capital, a currency and rates risk management firm. “You have to buy dips.” Australia’s currency traded at 95.99 U.S. cents as of 2:39 p.m. in Sydney from 96.09 cents in New York yesterday, when it reached as high as 96.45 cents, the most since July 2008. It has risen 7.8 percent this month, gaining 14 percent since June 30. The currency fetched 80.87 yen from 81 yen. New Zealand’s dollar traded at 73.39 U.S. cents from 73.45 cents. It bought 61.82 yen from 61.92 yen. Benchmark interest rates are 4.5 percent in Australia and 3 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits. Fed Reserve Bank of Atlanta President Dennis Lockhart will speak on the U.S. economic outlook today. Fed Chairman Ben S. Bernanke and fellow policy makers hinted last week they are willing to embark on another round of so-called quantitative easing asset purchases to spur growth and support prices. Gains Capped RBA Governor Glenn Stevens will raise borrowing costs to 4.75 percent next week, according to the median estimate of economists in a Bloomberg News survey. The extra yield investors get by investing in two-year Australian debt relative to similar-maturity U.S. Treasuries was at 4.39 percentage points today after reaching 4.43 points yesterday. Gains in the Australian dollar were limited as its 14-day relative strength index against the greenback held for a third day above the 70 level that indicates a currency may reverse course after rising too rapidly. “The market is looking for further momentum to go higher and fresh buyers and there aren’t any around at this point,” said Alex Sinton, a senior dealer in Auckland at ANZ National Bank Ltd., New Zealand’s largest lender. The Aussie also risks a pullback if the central bank disappoints markets by keeping interest rates unchanged, he said. Australian bond futures rose, with the 10-year contract for December delivery at 94.9 on the Sydney Futures Exchange from 94.84 yesterday. The implied yield on the futures fell six basis points to 5.10 percent. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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