By Ye Xie and Lukanyo Mnyanda Oct. 19 (Bloomberg) -- The dollar dropped versus Australia’s currency as a Reserve Bank of Australia official signaled a move to “more normal” borrowing costs, indicating the nation’s rate premium may widen. The Aussie traded within a U.S. cent of the highest level in 14 months against the dollar, while New Zealand’s currency, known as the kiwi, climbed to almost its strongest since July 2008. The pound declined against the dollar after the Sunday Times reported that a Bank of England policy maker may support an extension of the central bank’s asset-purchase program. “The general weakness in the dollar is still in place,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world’s largest foreign-exchange trader. “We think a rate hike from the RBA in November is more likely than not. The market will continue to buy up the Aussie until the RBA shifts its stance. I’d rather not fight the market.” The dollar fell 0.5 percent to 92.11 U.S. cents versus the Australian currency at 8:56 a.m. in New York, from 91.65 cents on Oct. 16, when it traded at 92.70 cents, the highest level since August 2008. New Zealand’s dollar appreciated 0.7 percent to 74.61 U.S. cents after reaching 74.96 cents on Oct. 16, the strongest level since July 2008. Against the euro, the dollar declined 0.1 percent to $1.4921, from $1.4905 at the end of last week. It touched a 14- month low of $1.4968 on Oct. 15. The yen was little changed at 90.81 per dollar and 135.53 versus the euro. Futures on the Standard & Poor’s 500 Index expiring in December climbed 0.6 percent. Weaker Sterling Sterling fell 0.2 percent to $1.6329 and was 0.3 percent weaker at 91.41 pence per euro after the Sunday Times reported that Adam Posen, a member of the Monetary Policy Committee, said he’s “not worried about overshooting inflation right now.” He may back increasing the bank’s asset-purchase program from the current 175 billion pounds ($286 billion) to help the economy recover, the newspaper said. Philip Lowe, assistant governor of the RBA, said today at a conference in Sydney it was “appropriate” to remove monetary stimulus as the economy improves. The central bank’s Governor Glenn Stevens unexpectedly increased the nation’s key rate to 3.25 percent on Oct. 6. The rate in New Zealand is 2.5 percent, compared with 1 percent in the 16-nation euro zone. Benchmark interest rates are 0.1 percent in Japan and as low as zero in the U.S., making them favorite funding currencies for carry trades, in which investors borrow where interest rates are relatively low and buy assets in countries where returns are higher. The risk in such trades is that currency-market moves will erase profits. New Zealand Rate New Zealand’s central bank is likely to drop its monetary- easing bias at its meeting next week as economic data point to improvement in the South Pacific nation’s economy, according to UBS AG, the world’s second-biggest currency trader. That will help the kiwi because “investors will question whether the central bank can keep interest rates on hold until the middle of next year,” Mansoor Mohi-uddin, UBS’s Zurich- based chief currency strategist, wrote in a note. The euro gained versus the dollar even as some investors speculated finance ministers from the 16-nation region meeting in Luxembourg will focus on the currency’s strength. Luxembourg’s Jean-Claude Juncker, who heads the so-called eurogroup and also serves as his nation’s prime minister, said last week the currency’s gains will be discussed. “We’ll tell you after the meeting if there’s something new to be said, a kind of extension to the normal poem,” Juncker said last week. “But I guess the poem will stay as the poem was,” adding that “we don’t like excessive volatility in exchange rates and disorderly movements.” Pimco’s Outlook The U.S. currency will extend declines as the global economy’s recovery prompts investors to shift away from U.S. assets, according to Pacific Investment Management Co., which runs the world’s biggest bond fund. Fundamental forces are set to put downward pressure on the dollar as the recovery gathers momentum, Richard Clarida, Pimco’s strategic adviser, wrote on the company’s Web site. Those forces include massive budget deficits and speculation the Federal Reserve will keep borrowing costs near zero for an extended period of time. In the U.S., the National Association of Home Builders/Wells Fargo confidence index rose to 20 in October from 19 in September, a Bloomberg News survey showed before the report is released today. Asian central banks are running out of ammunition to fight their currencies’ biggest rally since 1998, paving the way for South Korea, Taiwan, Indonesia, Thailand and India to help lead foreign-exchange performance next year. JPMorgan Chase & Co.’s index of Asian currencies has risen 5.6 percent since its strongest two quarters in 11 years began March 31. Of 34 currencies ranked by Bloomberg forecast surveys, the won, Taiwan dollar, rupiah, baht and rupee will be among next year’s dozen strongest, median estimates show. The won has the best prospects and is the second-most undervalued of 16 major currencies as measured by purchasing power. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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