Oct. 30 (Bloomberg) -- Australia's dollar fell from a 23- year high and New Zealand's currency declined as traders pared bets the U.S. will lower interest rates by a half percentage point tomorrow.

The Federal Reserve will reduce its target rate to 4.50 percent from 4.75 percent as there isn't enough evidence of a weaker economy to justify a bigger reduction, economists say. Prospects the gap between U.S. and Australian and New Zealand rates won't widen by 50 basis points diminished the lure of the two countries' higher-yielding assets.

``It's now looking like a choice between doing nothing or cutting 25 basis points, rather than the 50 point cut some had been getting excited about,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets inc. in Greenwich, Connecticut. ``There's a bit of caution out there, which has tempered the Aussie and the New Zealand dollar.''

Australia's currency dropped 0.9 percent to 91.66 U.S. cents at 5:01 p.m. in Sydney, from 92.52 cents in late Asian trading yesterday, when it reached 92.72 cents, the strongest since April 1984. It bought 104.87 yen, from 105.93 yen yesterday.

New Zealand's dollar lost 0.7 percent to 76.66 U.S. cents. It also fell against Japan's currency, trading at 87.78, from 88.35 yen.

A report in the Financial Times newspaper suggesting Fed policy makers are resisting the notion of a ``guaranteed rate cut'' deterred some investors from buying the Australian and New Zealand dollars, said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. The report was dated Oct. 28.

Boosted Differential

Australia's currency has jumped 10.8 percent and New Zealand's 9.3 percent since Sept. 18, when the Fed reduced its target rate a half-percentage point to 4.75 percent, in a bid to stimulate growth in the world's largest economy. The cut increased the differential between U.S. and Australian rates to 1.75 percentage points, and boosted the gap with New Zealand to 3.5 points.

Both the Australian and New Zealand dollars are favorites for the so-called carry trade, where funds borrowed in countries with lower borrowing costs are invested elsewhere, where the returns are higher. New Zealand's record 8.25 percent official cash rate is the highest after Iceland's among AAA rated nations. Australia's cost of borrowing is 6.5 percent, an 11-year high.

Interest-rate futures traded on the Chicago Board of Trade show a 98 percent chance the Fed will lower its target rate for overnight bank loans by a quarter-percentage point to 4.50 percent at their meeting starting today. The probability of a half-point cut is at 2 percent.

Building Consents

``The market got a bit ahead of itself in terms of its expectations of the cut,'' Hampton said.

New Zealand's dollar was little changed after a report showed the country's home-building approvals dropped in September.

Reserve Bank of New Zealand's Governor Alan Bollard has raised rates four times this year in a bid to stifle demand for housing, which he says is accelerating inflation. He kept the rate on hold at reviews in September and October, and is unlikely to change it at the next meeting in December, according to an index calculated by Credit Suisse Group based on trading in interest rate swaps.

Australia's dollar has risen 1.9 percent in the past five days as traders bet the Reserve Bank of Australia will increase its benchmark rate next week.

Government Bonds

``The Australian dollar's made remarkably strong gains recently,'' said John Horner, a currency strategist at Deutsche Bank AG in Sydney. ``There's little coming up to derail the current uptrend.''

The odds of the RBA increasing its overnight cash rate on Nov. 7 by a quarter point is at 85 percent, according to Credit Suisse's index. That has increased from 58 percent a week ago, after a report Oct. 24 showed the central bank's weighted-median inflation measure, which excludes the largest price gains and declines, climbed 1 percent in the third quarter, the biggest increase since 1991.

Australia's government bonds declined, pushing the yield on the two-year benchmark security up 2 basis points to 6.67 percent, the highest since March 2000. New Zealand's two-year bond yields rose 4 basis points to a two-month high of 7.15 percent. Bond prices move inversely to yields and a basis point is 0.01 percentage point.

To contact the reporters on this story: Emma O'Brien in Wellington at eobrien6@bloomberg.net; David McIntyre in Sydney at dmcintyre2@bloomberg.net

Last Updated: October 30, 2007 02:04 EDT