By Candice Zachariahs March 1 (Bloomberg) -- The Australian dollar rose to its strongest in 25 years against the pound and gained versus 14 of its 16 major counterparts on speculation the South Pacific nation’s central bank will increase interest rates tomorrow. The so-called Aussie advanced for a fourth day against the pound after people briefed on the matter said London-based Prudential Plc is in talks to buy a Hong Kong life insurance division from American International Group Inc. for more than $35 billion. New Zealand’s currency pared an earlier advance after the Treasury Department said its economy lost some momentum in the first months of 2010. The Aussie may gain further versus the pound “particularly with the euro-zone in focus in terms of fiscal risks and the U.K. not far behind in terms of health,” and the AIG-Prudential deal being a “pound negative,” said Michael Katz, a currency strategist at Forecast Ltd. in Sydney. “The moves today in Aussie are going to be largely positioning into tomorrow’s RBA decision with the market priced now well above 50 percent” for an increase, he said. Australia’s currency rose 0.7 percent to 59.182 pence as of 4:21 p.m. in Sydney from 58.761 pence on Feb. 26 and touched 59.315, the strongest since 1985. The Aussie rose 0.2 percent to 89.74 U.S. cents and advanced 0.4 percent to 79.93 yen. New Zealand’s dollar traded at 69.86 U.S. cents from 69.82 cents on Feb. 26. It rose 0.2 percent to 62.23 yen. A confirmation of the AIG-Prudential deal “could have a very strong positive impact” on U.S. and European equities and take the Australian dollar above 90 cents, Katz said. Bets Rise There’s a 58 percent chance the Reserve Bank of Australia will increase its target rate to 4 percent at its meeting tomorrow, according to futures traders. The Aussie maintained its gains after the Bureau of Statistics reported profits at the nation’s businesses rose 2.2 percent in the three months to Dec. 31, the first advance in five quarters. “The main event this week will be the RBA, which will set the scene for whether or not the Aussie pushes higher,” said Khoon Goh, a senior economist at ANZ National Bank Ltd. in Wellington. “Further strength in the Aussie data flow will have the market pricing in higher odds of higher interest rates.” The Australian dollar will meet so-called resistance near the 90-U.S. cent level while New Zealand’s currency may be sold if it approaches 70.80 U.S. cents, Goh said. National Australia Bank Ltd. recommended investors buy the Aussie below 90 cents, positioning for an advance to parity. “Australia’s superior economic growth, rising official interest rates and low public debt suggest the Aussie dollar should keep outperforming over the next three to six months,” wrote analysts led by John Kyriakopoulos, head of currency strategy at National Australia Bank in Sydney, in a note to clients. Long Positions Futures traders increased bets the Australian dollar will strengthen against the U.S. currency, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on an advance in the Aussie compared with those on a drop -- so-called net longs -- was 38,992 on Feb. 23, compared with net longs of 27,003 a week earlier. Benchmark interest rates are 3.75 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. China Manufacturing Demand for the Australian and New Zealand currencies was tempered after a report showed manufacturing in China expanded by the least in a year in February. The Purchasing Managers’ Index for China, Australia’s largest trading partner, fell to a seasonally adjusted 52, according to Li & Fung Ltd., a Hong Kong-based company that releases data for the Federation of Logistics and Purchasing. Australian government bonds were little changed with the yield on the benchmark 10-year notes at 5.44 percent, according to data compiled by Bloomberg. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was at 4.14 percent. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.

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