By Candice Zachariahs Sept. 17 (Bloomberg) -- The Australian and New Zealand dollars reached the strongest levels in more than a year against the greenback as signs of a global recovery boosted demand for higher-yielding assets. The currencies gained for a third day versus the yen as the Bank of Japan raised its assessment of the world’s second- biggest economy and South Korea said gross domestic product will likely shrink this year less than earlier estimated. U.S. reports on industrial output and consumer prices yesterday showed the world’s largest economy is emerging from its slump without spurring inflation. “We’re in a sweet spot with central bankers telling us rates will remain low for an extended period and data continuing to come in significantly above expectations,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp. “The Aussie looks tremendously attractive from a yield perspective.” Australia’s currency rose as high as 87.57 U.S. cents, the most since Aug. 22, 2008, before trading at 87.38 cents as of 2:15 p.m. in Sydney from 87.35 cents in New York yesterday. The currency advanced 0.1 percent to 79.54 yen. New Zealand’s dollar touched 71.55 cents, also the most since Aug. 22, 2008, before slipping 0.1 percent to 71.31 cents. It gained to 64.93 yen from 64.90. BOJ Governor Masaaki Shirakawa and his colleagues kept the overnight lending rate at 0.1 percent and described the economy as “showing signs of recovery.” They said last month it had “stopped worsening.” U.S. Output, Rates Output at U.S. factories, mines and utilities climbed 0.8 percent last month, exceeding the median estimate of economists surveyed by Bloomberg News, data from the Federal Reserve in Washington showed yesterday. The Labor Department said the cost of living climbed 0.4 percent, and was down 1.5 percent from August 2008. Bets on an economic recovery drove the London Metals Index up by the most since Aug. 3 yesterday. Commodities account for 60 percent of Australia’s exports and 70 percent of New Zealand’s. Benchmark interest rates are 3 percent in Australia and 2.5 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. “We are seeing some increased attraction for carry trades such as high-risk currencies,” such as the Aussie and kiwi dollars, said Mitul Kotecha, head of global foreign-exchange strategy at Calyon in Hong Kong in a Bloomberg Television interview. “The dollar is now a very good funding currency.” Basket Trade Investors may benefit by betting the Aussie will rise against a basket of currencies including the yen, U.S. dollar, Swiss franc and New Zealand dollar, Patrick Bennett, a Hong Kong-based currency strategist at Societe Generale SA, wrote in a note to clients today. “We also still like the Australian dollar higher,” he wrote. Demand for New Zealand’s currency was trimmed as the nation’s manufacturing industry contracted at a faster pace in August, adding to signs its recovery from the worst recession in three decades will be weak. The manufacturing index was 48.7 from 49.6 in July, Bank of New Zealand Ltd. and Business New Zealand, a Wellington-based employer group, said. A reading below 50 indicates that manufacturing is contracting. The Reserve Bank of Australia said it would not add cash to the system today after estimating money markets will have a deficit of A$67 million ($58.5 million). That deficit rose as high as A$7.8 billion on Oct. 21 as credit markets froze after the collapse of Lehman Brothers Holdings Inc. Australian government bonds fell, ending four days of gains. The yield on 10-year notes added seven basis points, or 0.07 percentage point, to 5.32 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 slipped 0.532, or A$5.32 per A$1,000 face amount, to 99.460. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 4.05 percent.

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