May 28 (Bloomberg) -- New Zealand’s dollar advanced after Standard & Poor’s raised the outlook on the country’s sovereign debt rating to stable from negative. Australia’s currency also strengthened.

The New Zealand dollar extended a three-month rally and swap rates fell after S&P said today’s budget showed the “government in sound position” and affirmed its foreign- currency debt rating at AA+. Australia’s dollar climbed as a gauge of future growth increased.

The budget “strikes an appropriate balance between providing short-term stimulus while at the same time putting New Zealand onto a firmer path of long-term fiscal consolidation,” said Kyran Curry, a Melbourne-based credit analyst at S&P. The strength of New Zealand’s dollar has “the risk of weighing on a full recovery and export volume growth,” Curry said.

New Zealand’s dollar rose 1.7 percent to 62.49 U.S. cents at 1:26 p.m. in New York, from 61.45 cents yesterday. The kiwi gained 3.2 percent to 60.43 yen. Australia’s currency advanced 1.1 percent to 78.38 U.S. cents and appreciated 2.7 percent to 75.98 yen.

New Zealand’s Finance Minister Bill English announced a budget that deferred income-tax cuts for 2010 and 2011 that he had promised to help win last year’s election. He also suspended payments to the nation’s pension plan, while maintaining spending to buoy the economy.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, fell to 3.57 percent from 3.66 yesterday.

Bond Premiums

The Australian and New Zealand dollars are among the best performers against the U.S. currency this month, supported by 10-year government bonds that offer premiums of 1.65 percentage points and 2.13 percentage points respectively over comparable- maturity Treasuries.

Central bank benchmark interest rates are 3 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 climbed on speculation investors will buy the nation’s higher-yielding assets on optimism the global economy is improving.

An index of the Australia’s leading economic indicators rose in March for a second month as share prices, rural-goods exports and money supply gained. The measure, compiled by the New York-based Conference Board, climbed 0.4 percent to 112.2 points, after advancing 0.2 percent in February.

The leading index uses previously reported statistics and estimates of economic indicators, such as profits and exports, to predict the pace of growth in coming months.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.

Last Updated: May 28, 2009 13:32 EDT