Oct. 6 (Bloomberg) -- The Australian dollar climbed to its highest since August 2008 after the central bank raised borrowing costs, the first interest-rate increase among the Group of 20 nations, boosting demand for the country’s assets. New Zealand’s dollar surged to its strongest in 14 months against the U.S. currency after the Independent newspaper said Persian Gulf States may stop using the greenback for oil trading. The two South Pacific currencies also advanced as Asian equities rose and prices jumped for commodities that account for more than half of Australia and New Zealand’s export earnings. “This is going to provide tremendous support for the Australian dollar because this is likely to be the start of a series of rate hikes,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia. “The Aussie risks going over 90 cents over the next 24 to 48 hours, particularly if this negative U.S. dollar sentiment gathers momentum.” Australia’s currency rose as high as 88.66 U.S. cents, the most since Aug. 11, 2008, before trading 1 percent stronger at 88.64 cents as of 4:12 p.m. in Sydney, from 87.79 cents in New York yesterday. The Australian dollar advanced 0.5 percent to 79.02 yen. New Zealand’s dollar rose as high as 73.47 cents, the most since July 2008, before trading at 73.43 U.S. cents. It rose as high as NZ$1.1934 per Australian dollar, the most since January, and bought 65.30 yen. Rate Increase Reserve Bank of Australia Governor Glenn Stevens increased the overnight cash rate target to 3.25 percent from 3 percent in Sydney today. Only one of 20 economists surveyed by Bloomberg News forecast today’s decision. The rest predicted no change. “The risk of serious economic contraction in Australia” has now passed, Stevens said in a statement. “The board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” he said. Benchmark interest rates in Australia and New Zealand, which has a target rate of 2.5 percent, compare with 0.1 percent in Japan and as low as zero in the U.S. That attracts investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits. U.S. Dollar Weakness Both South Pacific nations’ currencies earlier advanced as the U.K.-based Independent reported that oil-producing Arab nations are seeking to move to a basket of currencies, including the yen, the yuan, the euro and gold to settle transactions. “That article would have contributed to the depreciation of the U.S. dollar, especially as it comes on the heels of talks in recent weeks and months that the world should move away from having the greenback as a reserve currency,” said Besa Deda, chief economist at St. George Bank Ltd. in Sydney. New Zealand’s dollar also gained after business confidence jumped to a 10-year high as the country’s recession ended. A net 36 percent of companies surveyed last quarter expect the economy will improve over the next six months, the New Zealand Institute of Economic Research said today in Wellington. That compares with a net 25 percent that forecast a deterioration in the second quarter. The net figure is calculated by subtracting the pessimists from optimists. Trade Gap “The Australian dollar will struggle relative to other risk currencies like the New Zealand dollar, Canadian dollar and British pound,” said John Horner, a currency strategist in Sydney at Deutsche Bank AG, the world’s largest foreign-exchange trader. “The good news that the RBA has reacted to doesn’t seem as priced into those currencies as it currently is in the Australian dollar.” The so-called Aussie earlier slipped by as much as 0.2 percent today after the Bureau of Statistics said Australia’s trade deficit narrowed to A$1.52 billion ($1.33 billion) in August, wider than the A$900 million forecast by economists. Australian government bonds rose. The yield on 10-year notes fell one basis point, or 0.01 percentage point, to 5.19 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 climbed 0.063, or A$0.63 per A$1,000 face amount, to 100.421. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 4.29 percent. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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