By Candice Zachariahs Aug. 13 (Bloomberg) -- The Australian and New Zealand dollars strengthened after the Federal Reserve said “activity is leveling out” in the world’s largest economy, boosting demand for higher-yielding assets. The currencies gained for a second day as regional equities rose the most in two weeks and commodities advanced, with crude oil headed for its first back-to-back gain in more than a week. The U.S. central bank yesterday acknowledged signs the worst recession since the 1930s may be ending. “The Fed was relatively upbeat in their outlook so we’ve seen a return in appetite for growth-sensitive currencies,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “The key driver for the Australian and New Zealand dollars today will be Asian equities.” Australia’s currency rose 0.3 percent to 83.59 U.S. cents as of 2:48 p.m. in Sydney from 83.37 cents in New York yesterday. The currency advanced 0.1 percent to 80.18 yen. New Zealand’s dollar gained 0.2 percent to 67.34 U.S. cents from 67.18 in New York yesterday. It bought 64.60 yen from 64.53. The Fed also indicated U.S. interest rates will be “exceptionally low” for an extended period, preserving the yield advantage for the Australian and New Zealand currencies. 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. The risk in such trades is that currency market moves will erase profits. The Australian and New Zealand dollars also gained as prices rose for commodities, which account for more than half of the countries’ exports. Crude oil for September delivery gained as much as 1 percent to $70.89 a barrel on optimism that energy demand will increase after the Fed said the U.S. recession is easing. Copper climbed to the highest price since October as renewed economic growth increased demand for industrial metals. Moody’s Report Demand for the New Zealand dollar waned earlier after Moody’s Investors Service said rising unemployment and weaker commodity prices will likely increase loan defaults as the nation struggles to emerge from its worst recession in three decades. New Zealand’s manufacturing industry contracted in July for a 15th month. The pace of contraction was the slowest since May 2008. The manufacturing index rose to 49.7 from 46.5 in June, Bank of New Zealand Ltd. and Business New Zealand, a Wellington- based employer group, said. A figure below 50 indicates that manufacturing is contracting. New Zealand’s dollar may climb towards 67.66 U.S. cents and 65 yen and Australia’s currency may advance to 83.70 cents and 80.50 yen today, Hampton said. Australian government bonds fell. The yield on 10-year notes added 12 basis points, or 0.12 percentage point, to 5.70 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 slipped 0.882, or A$8.82 per A$1,000 face amount, to 96.745. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, rose to 4.10 percent from 4.06 yesterday. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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