Feb. 14 (Bloomberg) -- The Australian dollar rose and bonds declined after a government report showed the unemployment rate fell to the lowest since 1974, spurring traders to add to bets the Reserve Bank of Australia will raise interest rates in March.

The local dollar, known as the Aussie, climbed against all of the 16 most-traded currencies on prospects higher borrowing costs will encourage investors to funnel funds into Australian dollar-denominated assets. The yield advantage on Australia's two-year government notes over similar-maturity U.S. Treasuries widened to 4.99 percentage points, the most since 1990.

``The data highlights a very high risk that the RBA will be forced to follow up its February rate hike with one in March,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. ``There's a bias to play a long Aussie'' versus New Zealand's dollar, she said. A long position is a bet on an asset price's gain.

The Australian dollar rose to 90.28 U.S. cents as of 5:19 p.m. in Sydney from 89.78 cents immediately before the report was issued and 89.86 cents in late Asian trading yesterday. It climbed to NZ$1.1481 versus NZ$1.1422.

The local dollar may advance to as high as 93 cents and NZ$1.20 within three months, Trinh forecast.

The Bureau of Statistics said in Sydney the number of people employed climbed 26,800 in January, beating estimates of economists surveyed by Bloomberg News for 15,000 new jobs. The jobless rate fell to 4.1 percent from 4.3 percent.

``The economy seems to be doing pretty well,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. ``I'd like to see the Aussie on the upside.''

The currency may rise to 90.50 cents today, Lee said.

Traders Raise Bets

Traders are assigning 85 percent odds that the central bank will increase its target rate by a quarter-percentage point to 7.25 percent at its March 4 meeting, a Credit Suisse Group index based on interest-rate swaps shows. The probability was 74 percent before the report and 30 percent late last week.

Gains in Australia's dollar may be curbed by speculation a rise in borrowing costs between lenders may reduce the size of central bank interest-rate increases this year.

``The focus is on the downside for the Australian dollar,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``There's ongoing concern that financial sector stresses will eventually darken the domestic growth outlook.''

Australia's three-month bank bill swap rate, which banks use to determine yields on variable rate loans, jumped 18 basis points this week to 7.64 percent. The risk of Australian companies defaulting on their debt rose yesterday to the highest since credit-default swap indexes started in 2004.

Australian government bonds fell for a sixth day. The yield on the benchmark two-year note rose 11 basis points, or 0.112 percentage point, to 6.92 percent, the highest since Dec. 26. The price of the 7.5 percent bond maturing in September 2009 declined 0.167 or A$1.67 per A$1,000 face amount, to 100.844. Bond yields move inversely to prices.

To contact the reporter responsible for this story: Ron Harui in Singapore at rharui@bloomberg.net.

Last Updated: February 14, 2008 01:23 EST