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 interest-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 euro 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 weakened 0.8 percent to 92.38 U.S. cents versus the Australian currency at 10:35 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 1 percent to 74.84 U.S. cents after reaching 74.96 cents on Oct. 16, the strongest level since July 2008. Against the euro, the dollar declined 0.3 percent to $1.4945, from $1.4905 at the end of last week. It touched a 14- month low of $1.4968 on Oct. 15. The yen advanced 0.4 percent to 90.60 per dollar, from 90.89, and appreciated 0.2 percent to 135.27 versus the euro, from 135.48. The Federal Reserve Bank of New York said it’s working with market participants to assess the use of reverse repurchase agreements to drain the record amount of cash it added to the financial system. Fed Funds Target The central bank, which kept its overnight lending rate in a range of zero to 0.25 percent at its Sept. 23 meeting, said “no inference should be drawn” as to policy tightening. Fed Vice Chairman Donald Kohn said last week that slow growth warrants very low interest rates for an “extended period.” Chairman Ben Bernanke will speak on Asia and the global financial crisis at 11 a.m. New York time in San Francisco. Sterling was little changed at $1.6351 and was 0.3 percent weaker at 91.37 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. Stronger Pound The pound climbed 3.2 percent last week in its biggest advance since May 22 after the Financial Times reported that Bank of England Markets Director Paul Fisher said policy makers would be more likely to suspend asset purchases. Philip Lowe, assistant governor of the RBA, said today 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 cash target to 3.25 percent on Oct. 6. The target rate in New Zealand is 2.5 percent, compared with 1 percent in the 16-nation euro zone. Traders are betting the Australian and New Zealand central banks will increase borrowing costs by more than 2 percentage points over 12 months, according to a Credit Suisse Group AG index based on swaps trading. Benchmark interest rates of 0.1 percent in Japan and as low as zero in the U.S. make the yen and dollar favorite funding currencies for carry trades, in which investors borrow where interest rates are relatively low and buy assets in nations where returns are higher. The risk in such trades is that currency-market moves will erase profits. Euro Versus Dollar 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.” 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. Pressure on Greenback 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. 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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