June 26 (Bloomberg) -- The Australian and New Zealand dollars climbed after the U.S. Federal Reserve gave no indication when it will begin raising interest rates after leaving them unchanged yesterday.

Australia's dollar advanced to the highest in more than two weeks and New Zealand's dollar gained for a second day as traders reduced bets the Fed will increase rates in September. Speculation the two nations will retain their yield advantage over the U.S. spurred investors to put funds into assets offering higher returns.

``The Fed has moved to neutral and maybe wasn't as aggressive as some had expected,'' said Alex Sinton, a senior currency trader at ANZ National Bank Ltd. in Auckland. ``The Australian dollar has moved higher and dragged the kiwi with it,'' he said, calling New Zealand's currency by its nickname.

Australia's dollar rose to 96.02 U.S. cents, the highest level since June 10, before trading at 95.78 U.S. cents as of 5:08 p.m. in Sydney from 95.53 cents late in Asia yesterday. It has gained 5 percent this quarter and 9.5 percent this year.

New Zealand's dollar traded at 75.56 U.S. cents from 75.60 cents late in Asia yesterday. The currency has fallen 3.8 percent this quarter and 1.2 percent this year.

The Australian currency gained for a third day as Fed policy makers kept its key rate at 2 percent and said ``uncertainty'' about the inflation outlook remains high. Some traders had forecast policy makers would signal borrowing costs may need to rise.

Rate Bets

Futures contracts on the Chicago Board of Trade show a 66 percent chance the Fed will hold the target rate for overnight lending between banks unchanged at its September meeting, compared with 10 percent odds the previous day. There's a 94 percent probability the Fed will keep rates on hold at its August meeting.

Benchmark interest rates are 7.25 percent in Australia and 8.25 percent in New Zealand, compared with 2 percent in the U.S. and 0.5 percent in Japan, making the Australian and New Zealand currencies favorites for the so-called carry trade.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.

``We've got cash rates at 7.25 percent, so the currency really is one of the highest-yielding currencies around the globe,'' Martin Lakos, division director at Macquarie Private Wealth in Sydney, said in a Bloomberg Television interview. ``It is possible that it'll move through to parity,'' he said referring to the Australian dollar against the U.S. dollar.

Deficit Narrowed

Australia's dollar climbed as high as 103.71 yen, the most since November, from 103.13 yen late in Asia yesterday. The currency has gained 6 percent this year against the yen. New Zealand's dollar rose to 81.71 yen from 81.60 yen. It has appreciated 4.4 percent this quarter, paring its drop this year to 4.5 percent.

New Zealand's dollar tempered today's advance after a government report showed the current-account deficit narrowed less than economists expected last quarter as payments to foreign investors accelerated.

The gap shrank to NZ$13.79 billion ($10.4 billion) in the 12 months ended March 31, from NZ$13.84 billion in the year through December, Statistics New Zealand said today. The median estimate of economists surveyed by Bloomberg News was for a NZ$13.32 billion shortfall.

`Lose Confidence'

``There is a risk, with the economy in the midst of a recession, that investors could lose confidence in New Zealand's ability to meet its obligations, which is a big negative for the currency,'' said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney.

A separate government report tomorrow may show New Zealand's economy contracted 0.3 percent in the first three months of the year, according to the median forecast of 13 economists surveyed by Bloomberg. Seven said the economy may also shrink in the second quarter, pushing New Zealand into its first recession since 1998.

Australian 10-year government bonds fell. The yield on the 10-year note rose 3 basis points to 6.51 percent, according to data compiled by Bloomberg. The price of the 5.25 percent bond due March 2019 declined 0.222, or A$2.22 per A$1,000 face amount, to 90.361.

New Zealand's government debt rose with the 10-year yield falling 1 basis point to 6.41 percent. A basis point is 0.01 percentage point.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Tracy Withers in Wellington at twithers@bloomberg.net.

Last Updated: June 26, 2008 03:23 EDT