Business

Tue May 27 00:02:00 PDT 2008

SYDNEY, May 27 (Reuters) – The Australian dollar was buoyant near 25-year peaks against the U.S. dollar on Tuesday on growing expectations that domestic interest rates would be raised in the coming months to check stubbornly high inflation.

But the Aussie fell to its lowest in nearly three weeks against the New Zealand dollar <AUDNZD=R> after two separate surveys there pointed to persistent inflation, backing views New Zealand’s central bank was unlikely to cut rates in a hurry.

"We are expecting another two rate hikes and that will keep the Aussie well supported and possibly move towards parity in the coming months against the U.S. dollar," said Katie Dean, senior market economist at ANZ.

"But against the New Zealand dollar, we saw the Aussie stumble a bit after some better-than-expected data there."

The National Bank of New Zealand’s business outlook for May showed respondents expected inflation to average 3.44 percent over the next year, up from 3.29 percent in the April survey.

A separate quarterly survey by the Reserve Bank of New Zealand also showed inflation expectations for the next two years had firmed [nWEL11185].

By 4:15 p.m. the Aussie <AUD=> had reached $0.9622/27 against the U.S. dollar from $0.9614/19 late here on Monday and not far from recent peaks. It hit a high of $0.9653 last Wednesday, a level not seen since the Aussie was floated in December 1983.

The U.S. dollar struck one-month lows against the euro <EUR=> in Asian trade, on growing worries that surging oil prices could lead to a sharp downturn in the United States.

In contrast, the Australian economy is expected to expand this year driven mainly by demand for commodities from Asia, and the central bank is likely to maintain a tightening policy bias with inflation still at 17-year highs.

The yield spread between U.S. and Australian two-year government bonds widened to 438 basis points on Tuesday from 423 points last week. Interest rate futures markets <CSRBA1Y=CSAU> are now pricing in a domestic rate hike in the next 12 months.

"One can’t rule out one more rate hike if local economic conditions don’t slow to the extent expected by the Reserve Bank of Australia," economists at St George said in a report.

The Australian data calendar picks up later in the week and will provide clues about demand. First-quarter construction work data will be released on Wednesday followed by capital expenditure on Thursday. The central bank will release private credit figures on Friday.

Australian bond futures gave up their gains made in the previous session, falling back towards multi-month lows, weighed down by worries about the domestic rate outlook.

Three-year bond futures <YTTc1> fell by 0.075 points to 93.24, a three-month low, while the 10-year bond contract <YTCc1> shed 0.04 points to 93.50. —————-(Snapshot at 4:15 p.m./0615 GMT)————— FUTURES CASH YIELD 90-DAY BILL<YBAc1> (JUN) 92.24 (-0.03) <AU3MBB=RR> 7.69 (7.70) 3-YR BOND <YTTc1> (JUN) 93.240(-0.075) <AU3YT=RR> 6.75 (6.67) 10-YR BOND <YTCc1> (JUN) 93.500(-0.040) <AU10YT=RR> 6.48 (6.45) AUD/USD <AUD=> 0.9622 (0.9614) US 10-YR <US10YT=RR> 3.87 (3.85) ————————————————————— AUD VS 2-YR 10-YR *AUD 3-YR/10-YR SPREAD USD 438 ( 433) 261 ( 260) *FUTURES -0.260 (-0.225) CAD 383 ( 379) 283 ( 282) *AUD 2-YR/10-YR SPREAD NZD 3YR 0.08(-0.05) -11 ( -17) *CASH -38

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