March 12 (Bloomberg) -- The New Zealand and Australian dollars rose after the U.S. Federal Reserve said it will boost liquidity by making loans in exchange for debt, encouraging investors to return to higher-yielding currencies.

The local dollars surged the most in more than six weeks against the yen, as the plan to pump $200 billion into the financial system to avert a credit crunch spurred demand for so- called carry trades. The New Zealand and Australian currencies pared a loss this month against the U.S. dollar as investors were lured by the nations' interest rates of 8.25 percent and 7.25 percent respectively.

``Risk appetite had a shot in the arm from the liquidity measures,'' said Michael Gordon, currency strategist at Westpac Banking Corp. in Wellington. ``It's a positive move for riskier currencies like the'' New Zealand and Australian dollars.

New Zealand's dollar, also known as the kiwi, bought 80.38 U.S. cents at 6:42 p.m. in Wellington, from 79.88 cents in late Asian trading yesterday. The currency surged as much as 2.2 percent to 83.30 yen before trading at 82.76.

The Australian dollar climbed to 93.17 U.S. cents from 92.37 cents late in Asia yesterday. It jumped as much as 2.2 percent to 96.31 yen before buying 95.92.

The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems. Australia's central bank yesterday injected A$1.7 billion ($1.58 billion) into the financial system via so- called repurchase agreements to encourage bank lending, almost double the daily average for this year.

Higher-Yielding Currencies

The Australian and New Zealand dollars are considered higher-yielding currencies because their nation's benchmark interest rates compare with a 3 percent rate in the U.S. and 0.5 percent in Japan.

The currencies also gained as U.S. stocks rallied the most in five years, giving investors' confidence to get funds in a country with low borrowing costs and invest in another with higher rates, earning the spread between the two.

Currency fluctuations may erase the profit earned from the spread between the two rates in the so-called carry trades.

The New Zealand dollar pared its advance after a report showed today that home sales slumped and prices fell to a 12- month low in February, adding to signs the country's record-high interest rate may cool the economy.

`Set to Reverse'

Gains in the Australian dollar may be curbed as the nation's central bank is likely to begin lowering interest rates in six to nine months because of slowing inflation and economic growth, according to TD Securities Ltd.

``Australian dollar bullishness is set to reverse,'' wrote London-based global strategist Stephen Koukoulas, and Sydney- based senior strategist Joshua Williamson at TD Securities in a research note today.

The Australian dollar may fall to 90 U.S. cents by the end of June, 88 cents by the end of 2008 and 84 cents by the end of 2009, TD Securities forecast. It had predicted on Feb. 29 the currency would reach parity with the U.S. dollar this year.

Australia's currency also pared its advance after a report showed today that consumer confidence plunged to the lowest level in almost 15 years in March.

The sentiment index slid for a third month, down 9.1 percent to a seasonally adjusted 88.6 in March from February, according to a Westpac Banking Corp. and Melbourne Institute survey of 1,200 people released in Sydney. A reading lower than 100 shows pessimists outnumber optimists.

New Zealand government bonds fell for a second day while Australian government bonds gained. The yield on New Zealand's 6 percent note due December 2017 rose 2 basis points to 6.35 percent. The yield on Australia's 6 percent security maturing February 2017 fell 16 basis points to 6.05 percent, according to data compiled by Bloomberg. Bond yields move inversely to their prices and a basis point is 0.01 percentage point.

To contact the reporter on this story: Emma O'Brien in Wellington at eobrien6@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

Last Updated: March 12, 2008 01:48 EDT