Nov. 4 (Bloomberg) -- The Australian and New Zealand dollars rose as the Federal Reserve reiterated its plan to keep borrowing costs near zero for an extended period, spurring demand for higher-yielding assets.

“On the margin, this is positive for risk appetite, negative for the dollar and positive for currencies like the Australian dollar,” said Todd Elmer, currency strategist at Citigroup Inc. in New York. “But I don’t think the Fed statement is going to provide much of a lasting impact on trade.”

Australia’s currency rose 1.3 percent to 91.39 U.S. cents at 3:26 p.m. in New York, from 90.24 cents yesterday. It bought 82.95 yen, compared with 81.52 yen. New Zealand’s dollar appreciated 1.2 percent to 72.89 U.S. cents and gained 1.6 percent to 66.13 yen.

Benchmark interest rates are 3.5 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.

Australia’s dollar, the world’s best performer versus the greenback over the past year, earlier fell as retail sales unexpectedly dropped, spurring speculation that the central bank will temper the pace of interest-rate increases.

Reserve Bank Governor Glenn Stevens said yesterday it’s “prudent to lessen gradually” the stimulus provided by low borrowing costs in the statement accompanying his decision to raise interest rates by a quarter-percentage point for the second time in a month.

Fed’s Rate Decision

Fed officials kept their target overnight lending rate at zero to 0.25 percent, where it has been since December. The conditions they cited to keep it there are “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.”

The Fed completed its $300 billion program of purchasing Treasuries last month. Today’s statement said the central bank will purchase a total of $1.25 trillion of agency mortgage- backed securities and “about $175 billion of agency debt” through the first quarter of next year.

The Standard & Poor’s 500 Index added 1.1 percent, extended this year’s rally to 17 percent.

Auckland-based Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said milk powder prices rose 11 percent to a 15-month high at auction yesterday. Product for delivery in mid-2010 jumped 21 percent.

N.Z. Unemployment

New Zealand Finance Minister Bill English said the nation’s jobless rate will likely peak at about 7 percent sometime in 2010, less than the 8 percent the government previously expected. A report tomorrow will show the rate was 6.4 percent in the third quarter, according to economists in a Bloomberg survey.

“We remain of the view that higher cash rates are on the agenda from first quarter 2010, with the first tightening as soon as January after the RBNZ upgrades growth and inflation forecasts in December,” Annette Beacher, a senior strategist at TD Securities in Singapore, wrote in a note to clients today.

The bank expects the New Zealand dollar to end 2009 at 72 U.S. cents before climbing to 77 cents by the middle of 2010.

New Zealand’s cash budget deficit was NZ$3.29 billion ($2.4 billion) in the three months ended Sept. 30, or NZ$318 million narrower than forecast on delays in spending, the Treasury Department said in a statement today.

Australian government bonds fell. The yield on 10-year notes added eight basis points, or 0.08 percentage point, to 5.51 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due in March 2019 slipped 0.548, or A$5.48 per A$1,000 face amount, to 97.990.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, increased to 4.52 percent.

To contact the reporters on this story: Ruby Madren-Britton in New York at rmadrenbritt@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

Last Updated: November 4, 2009 15:36 EST