The New Zealand dollar was the best-performing major currency in the past month and has extended its gain amid speculation high bond yields will buoy the currency.
The yield on three-year government bonds is 2.04 percentage points more than the equivalent US maturity, its biggest gap since July last year.
Reserve Bank Governor Alan Bollard said last month he didn't expect to cut the interest rate from a record 7.25 per cent "for some considerable time".
Bank of New Zealand currency strategist Danica Hampton said: "The New Zealand dollar continues to be well supported by yield-seeking investors."
The dollar climbed to US66.35c yesterday, closing half a cent higher than the day before. The dollar has gained 1.8 per cent against the US dollar in the past four weeks, beating a 0.9 per cent gain in South Korea's won. They are the only two of 16 major currencies to rise against the dollar in that time.
Sales of New Zealand dollar-denominated Uridashi bonds to Japanese individuals are underpinning the currency, in a sign that the nation's yields are luring investors. The World Bank on Wednesday sold $282 million of two-year bonds.
There were two Uridashi sales totalling $162 million on September 29.
New Zealand's yield premium widened after US Treasury yields fell when Federal Reserve chairman Ben Bernanke said the housing market is showing a "substantial correction" and inflation will recede over time.
There was no hint from Bernanke that investors have pushed yields too low or gone too far in speculating the Fed's next move may be to cut borrowing costs, investors said.
Interest-rate futures indicate traders projected a 16 per cent likelihood the Fed will lower its benchmark interest rate by the end of the year.
In New Zealand, Bollard said last month that he was less confident interest rates won't have to rise because inflation isn't abating.
Still, the currency fell to a two-week low of 64.88 cents this week as investors bet slowing economic growth means Bollard has less scope to raise rates. Growth was 1.9 per cent in the year ended June 30, the slowest in five years.
The slowdown in growth doesn't mean the central bank is ready to cut interest rates soon, analysts say. Eleven of 13 economists surveyed expect no change in the rate until March next and two expect a quarter- point rise before December 31.
- BLOOMBERG
Surging NZ dollar leads the pack
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