Oct. 16 (Bloomberg) -- The Australian and New Zealand currencies rose for a second week against the dollar and yen amid speculation the South Pacific nations’ central banks will raise interest rates, boosting demand for their assets.

Australia’s currency touched a 14-month high against the greenback as 10-year government bond yields posted the biggest weekly increase in almost seven months after Reserve Bank of Australia Governor Glenn Stevens said yesterday he can’t be “too timid” in raising borrowing costs. New Zealand’s currency touched its strongest level versus the U.S. dollar since July 2008 as commodity prices rose.

“Stevens’s speech has caused markets and the economists fraternity to think there’s a possibility of 50 basis points in November and 75 points of tightening by the end of the year,” said Besa Deda, chief economist at St. George Bank in Sydney. “The market wants to take the Aussie dollar higher.” A basis point is 0.01 percentage point.

Australia’s currency touched 92.70 U.S. cents, the strongest level since August 2008, before trading 0.4 percent lower at 91.71 U.S. cents at 3:02 p.m. in New York, from 92.05 cents yesterday. For the week, it gained 1.5 percent, from 90.37 cents on Oct. 9. The currency touched 84.22 yen, the highest level since October 2008, before trading at 83.36, unchanged on the day and 2.8 percent higher on the week.

New Zealand’s dollar touched 74.96 U.S. cents, a 14-month high, before slipping 0.6 percent to 73.97 cents, a 0.7 percent increase from 73.43 on Oct. 9. It bought 67.21 yen, from 67.41 yen yesterday and 65.93 a week ago.

Aussie Parity

Pacific Investment Management Co. and Mellon Capital Management Corp. expect the Australian dollar to extend this year’s rally as the nation’s economy expands and the global slump comes to an end. Banks including Barclays Capital, BNP Paribas SA, Morgan Stanley and St. George signaled yesterday the Australian dollar may rise to parity with the U.S. currency.

Benchmark interest rates are 3.25 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 dollar will climb to 95 U.S. cents in three months and $1 in six months, before falling back to trade at 92 cents a year from now, David Forrester, a Singapore-based currency economist at Barclays, wrote in a note to clients. RBA Governor Stevens will increase the overnight cash rate target to 3.75 percent by year-end and 5.5 percent by the end of 2010, Barclays said.

‘Growing Confidence’

“Growing confidence in the global economic recovery and increasing conviction about further RBA rate hikes should help underpin the Australian dollar on dips toward 91.50 cents,” John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney, wrote in a note to clients today.

Demand for the Australian and New Zealand dollars may be trimmed by speculation their gains came too rapidly. The 14-day relative strength index was at 71.53 today on the Aussie and 63.93 on the kiwi. A reading of 70 indicates a rally is approaching an extreme and a reversal may be imminent.

“The Australian dollar is chronically overvalued,” Ronald Leven, a New York-based currency strategist at Morgan Stanley, wrote in a note to clients yesterday. “A marginal temporary parity break is still possible if metals keep rallying.”

The Reuters/Jefferies CRB index of 19 raw materials added 4.5 percent this week, rising for a fifth straight session today.

Australian government bonds fell for a third day. The yield on 10-year notes added one basis point, or 0.01 percentage point, to 5.58 percent. For the week, the yield gained 35.6 basis points, the most since March, from 5.22 percent on Oct. 9, according to data compiled by Bloomberg.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, fell to 4.67 percent from 4.68 yesterday. It was 4.37 percent a week ago.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

Last Updated: October 16, 2009 15:07 EDT