The Australian dollar maintained a two-day gain against its U.S. counterpart after a report signaled that China’s manufacturing may expand for the first time in four months, boosting demand for higher-yielding assets. The so-called Aussie reversed earlier declines versus the greenback after a preliminary index of Chinese purchasing managers showed a rebound in new orders and output. Gains in the currency were limited by data today showing the pace of Australian producer price increases slowed in the third quarter and as European leaders failed to assure investors that they are nearing a solution to the euro-area debt crisis. “Anything that comes through that’s positive on China is probably going to help the Aussie,” said Roland Randall, an economist at TD Securities Inc. in Singapore. “This is certainly consistent with the recent trend that we’ve been seeing in PMIs globally.” Australia’s dollar gained 0.2 percent to $1.0392 as of 3:48 p.m. Sydney time, after earlier losing as much as 0.6 percent. It rose 0.1 percent to 79.20 yen, after dropping as much as 0.7 percent. New Zealand’s dollar advanced 0.3 percent to 80.58 U.S. cents and gained 0.3 percent to 61.41 yen. Trading in the New Zealand dollar may be subdued today due to the Labour Day holiday in the nation, Westpac Banking Corp. said in an e-mailed note to clients. The preliminary reading of 51.1 for the Chinese manufacturing index released by HSBC Holdings Plc and Markit Economics today was the highest in five months and compares with the final reading of 49.9 for September and August. A reading above 50 indicates expansion. China is Australia’s largest trading partner. Australian PPI, CPI The Australian dollar earlier declined on speculation slowing inflation may prompt the Reserve Bank of Australia to consider lowering borrowing costs. “Any downside miss is likely to raise expectations of a near-term rate cut,” Emma Lawson, a Sydney-based currency strategist at National Australia Bank Ltd., wrote in a report today. Third-quarter producer prices in Australia rose 0.6 percent from the previous three months, the Bureau of Statistics said in Sydney today. That’s the slowest pace this year and compares with a 0.8 percent gain estimated by economists in a Bloomberg News survey. The country’s consumer price index probably rose 0.6 percent in the three months through September from the prior period, according to the median forecast of economists in a separate survey before the data is released on Oct. 26. Prices climbed by 0.9 percent in the second quarter. Rate Cut Expectations Traders are pricing in at least a 25-basis-point decrease in borrowing costs by the end of the year, cash-rate futures show. “An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary,” RBA Governor Glenn Stevens said in a statement after the bank’s last policy meeting in October, when officials held the overnight cash rate target at 4.75 percent. The central bank will keep its key rate unchanged when its next decision is announced on Nov. 1, according to 19 of 25 economists in a Bloomberg survey. Six have forecast a 25 basis point cut in the official benchmark. The Aussie has depreciated 1.5 percent this year, the third-worst performer among developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Risk Appetite Fluctuations “The Aussie dollar is susceptible to fluctuations in risk appetite,” said Thomas Averill, a director at the currency and interest-rate risk management company Rochford Capital in Sydney. Sentiment will “continue to fluctuate on headlines out of Europe until the market believes that a more sustainable solution has been found.” Meeting yesterday for their 13th crisis-management summit in 21 months, European leaders also explored how to strengthen the International Monetary Fund’s rescue role. They excluded a forced restructuring of Greece’s debt, sticking with the tactic of enticing bondholders to accept losses to help restore the country’s finances. A complete blueprint won’t come together until the next summit on Oct. 26. The Australian currency may drop below $1 this year before trading at $1.05 by December, Averill said. 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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