Jan. 28 (Bloomberg) -- The best bets in the currency market may be Australia, New Zealand and Brazil, where economists predict central bankers will keep interest rates unchanged, or even raise them, while growth continues unabated on rising exports to China.

Kokusai Asset Management Co., Pacific Investment Management Co. and Putnam Investments LLC are investing in southern hemisphere countries to benefit from the highest bond yields relative to U.S. debt this decade. Australia's two-year government bonds yield 4.5 percentage points more than Treasuries of similar maturity. In New Zealand, the gap is 5.1 percentage points, and in Brazil, it's 9.1 percentage points.

Australia, New Zealand and Brazil are best positioned to weather a slowdown in the U.S. because a rising percentage of their goods are headed to China, where growth may average 10.3 percent this year, said investors such as Masataka Horii at Kokusai in Tokyo. China has overtaken the U.S. as Australia's largest export market after Japan, and the nation increased imports from Brazil fivefold over the last six years. Brazil kept its target rate at 11.25 percent last week and New Zealand left its at 8.25 percent. The Reserve Bank of Australia meets next week.

``We're very bullish on Australia,'' said Horii, who helps manage the $50.2 billion Kokusai Global Sovereign Open fund, the world's second-biggest managed bond fund. ``The countries that are expected to hike rates are limited. They have good relations with Asian economies, especially China.''

Currencies Gain

The Australian dollar, New Zealand dollar and Brazilian real rallied last week after the Federal Reserve slashed its target for overnight loans between banks to 3.5 percent from 4.25 percent.

New Zealand's currency, known by traders as the Kiwi, gained 0.8 percent to 76.97 U.S. cents in the past five days, the real strengthened 0.5 percent to 1.7868, and the Australian dollar, nicknamed the Aussie, appreciated 1.3 percent to 87.92 U.S. cents.

Wall Street analysts aren't convinced the rallies will last. The Aussie may decline to 85 U.S. cents by year-end, according to the median forecast of 38 firms surveyed by Bloomberg. The economy is still too tied to the U.S., according to New York- based Lehman Brothers Holdings Inc.

``Those trumpeting decoupling better think twice,'' said David Mozina, senior vice president of foreign exchange strategy at Lehman, the fourth-largest U.S. securities firm.

Kokusai Doubles Holdings

Kokusai, Putnam, and Pimco are bullish anyway. Kokusai doubled holdings of Australian debt in the final three months of 2007 to 3 percent of its fund's assets.

Putnam forecast on Jan. 10 that the Aussie will rise 8 percent to 95 U.S. cents this year because of the widening rate advantage. The Boston-based firm is buying Australian dollars and Brazilian reais, said Paresh Upadhyaya, who helps manage $29 billion in currency assets as a senior vice president at Putnam.

The Brazil real is one the favorite currencies of Newport Beach, California-based Pimco, said Bill Gross, manager of the $112.7 billion Total Return Fund, the largest of its kind focused on fixed-income securities. Gross made the comments in an interview last week with Bloomberg Television.

The day after the Fed cut its target rate for overnight loans between banks, Brazil kept its benchmark Selic rate at 11.25 percent because exports of iron ore and food to China are spurring growth and fueling inflation. The Reserve Bank of New Zealand left its rate at 8.25 percent the following day.

At one point last week New Zealand two-year government bonds yielded 5.28 percentage points more than Treasuries of similar maturity, the most since 1991.

Relative Growth

``If the U.S. only slows to a mild recession, global growth will slow to trend and not tank,'' said Putnam's Upadhyaya. ``In that environment you can see a decoupling of some emerging markets and commodity currencies.''

Australia's economy will grow 3.8 percent this year, twice as fast as the 1.9 percent in the U.S., the International Monetary Fund estimates. New Zealand will expand 2.3 percent, Brazil 4 percent, and China 10 percent, according to the IMF.

The chance of Australia's central bank raising its 6.75 target on Feb. 5 increased to 63 percent from 22 percent after a Jan. 23 report showed underlying fourth-quarter inflation surged 3.8 percent, the most since 1991, according to a Credit Suisse Group index based on trading in interest-rate derivatives.

``Within the next three months, the Reserve Bank is going to raise rates,'' said Kei Katayama, who helps oversee $1.6 billion of debt in Tokyo at Daiwa Securities SB Ltd., part of Japan's second-largest brokerage. Katayama bought World Bank debt denominated in the local currency in December.

New Zealand Rate

China reported growth of 11.4 percent for 2007, the most since 1994. The country accounted for 17 percent of the global expansion, the same as the U.S., the United Nations estimates.

Reserve Bank of New Zealand Governor Alan Bollard told reporters in Christchurch on Jan. 25 that rates were ``where they should be'' because the U.S. is the ``odd one out'' among world economies. A Bloomberg survey this month showed he was likely to keep borrowing costs unchanged in the first half after inflation accelerated to 3.2 percent on an annualized basis last quarter, breaching the central bank's 3 percent target.

``New Zealand is a standout in terms of good growth and that persistent inflation,'' said John Rothfield, a senior currency strategist at Bank of America Corp. in San Francisco. The second-biggest U.S. bank forecasts the Kiwi will rise to 81 U.S. cents by March 31.

Bonds From Brazil

Brazil's central bank will keep its rate on hold this quarter, according to a Bloomberg survey of economists.

China bought 6.7 percent of Brazil's exports in 2007, up from 3.3 percent six years earlier. Shipments of products such as iron ore, soybeans and orange juice jumped more than fivefold to $10.8 billion in 2007 from $1.9 billion in 2001, according to Brazil's Industry and Trade Ministry.

``Brazil is one of the few countries where growth remains very strong, while everyone else is concerned about slowing growth,'' said Edwin Gutierrez, who owns Brazilian bonds as part of the $5.5 billion he invests in emerging-market debt for Aberdeen Asset Management Plc in London. The currency will gain to as high as 1.70 per U.S. dollar by the end of June, he said.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

Last Updated: January 28, 2008 03:26 EST