By Candice Zachariahs Dec. 18 (Bloomberg) -- The Australian dollar rose from a 10-week low as investors speculated the biggest weekly drop since February was an opportunity to buy the currency. New Zealand’s dollar also gained. The Australian dollar snapped a three-day decline as investors speculated its 2.6 percent slide this week, the worst performance against the greenback among its 16 most-traded counterparts, was overdone. The two South Pacific currencies were still set for a week of losses as stocks slumped worldwide after U.S. jobless claims unexpectedly increased and international regulators said banks must hold more capital. “The Aussie is due for a fairly choppy remainder of the year driven by further nervousness in equity and commodity markets,” said Thomas Averill, a Sydney-based senior consultant at HiFX, a foreign exchange risk management firm. “As long as your time horizon is long enough, you’re going to get value at these levels in both the Aussie and kiwi,” he said, referring to the currencies by their nicknames. Australia’s currency climbed to 88.85 U.S. cents as of 4:51 p.m. in Sydney from 88.67 cents yesterday in New York. It earlier declined to 88.11 cents, the least since Oct. 6. It has dropped 2.7 percent this week. The currency bought 79.66 yen from 79.77, heading for a second weekly loss. New Zealand’s dollar dropped as low as 70.66 U.S. cents, the weakest since Dec. 9, before trading at 71.13 cents from 71.04. The kiwi bought 63.77 yen from 63.90 yen. ‘Into Reverse’ The Australia also headed for a weekly loss as traders pared back expectations the central bank will raise interest rates at their next meeting in February. “All the drivers of the Aussie have gone into reverse -- U.S. dollar weakness has turned around and prospects for pretty rapid RBA tightening have certainly been pared back as well,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. Australia’s dollar will find buyers near 88.45 cents and then 88.10 cents, while New Zealand’s currency has “key support” at 70.70 cents, Jones said. Swaps traders lowered to 41 percent the possibility of the Reserve Bank of Australia increasing its target rate in February, according to a Credit Suisse AG index, from an 84 percent chance last week. Central bank Deputy Governor Ric Battellino said Dec. 16 that monetary policy is back in “the normal range,” damping prospects for higher interest rates. The bank raised borrowing costs for three straight months beginning Oct. 6. ‘Prolonged Pause’ “This week’s developments raise the possibility of a more prolonged pause as in 2003, 2004 and 2005 when the RBA paused in its tightening cycle for periods of at least 12 months,” Sue Trinh, a senior currency strategist in Sydney at RBC Capital Markets, wrote in a research note today. “The Australian dollar could be in for a much deeper period of underperformance as rate hike expectations unwind.” The bank recommends investors bet the Aussie will weaken against the Canadian and New Zealand dollars. Australian government bonds rose. The yield on the benchmark 10-year note fell 12 basis points to 5.36 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 advanced 0.88, or A$8.80 per A$1,000 face amount, to 99.23. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, rose to 4.51 percent from 4.50. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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